PubEntBRRR

Budgetary Review and Recommendation Report of the Portfolio Committee on Public Enterprises, dated 15 November 2017

The Portfolio Committee on Public Enterprises (hereinafter referred to as the Committee), having considered the performance of the Department of Public Enterprises for the 2016/17 financial year, reports as follows:

1. Introduction

1. Purpose of the BRRR

In terms of Section 5 of the Money Bills Amendment Procedure and Related Matters Act, No. 9 of 2009, the National Assembly, through its Committees, must annually compile the Budgetary Review and Recommendation Reports (BRRRs) that assess the service delivery performance of departments given available resources. Committees are also expected to provide an assessment of the effectiveness and efficiency of the Department’s use of available resources, and may include recommendations on the forward use of resources.

1.2       The Role and Mandate of Committee

The mandate of the Committee is to consider legislation referred to it; exercise oversight over the Department and the six state-owned companies (SOCs) that report to it; consider international agreements referred to it; consider the budget vote of the Department of Public Enterprises and its entities; facilitate public participation in its processes; and to consider all other matters referred to it in terms of legislation and the rules of the National Assembly.

1.3       Description of core functions of the Department

The Department of Public Enterprises is the shareholder representative for government at the state-owned companies in its portfolio. The Department’s mandate is to fulfil oversight responsibilities at these state-owned companies to ensure that they contribute to the realisation of government’s strategic objectives, as articulated in the National Development Plan (NDP), the medium-term strategic framework (MTSF), the new growth path and the industrial policy action plan. State-owned companies are crucial to driving the state’s strategic objectives of creating jobs, and enhancing equity and transformation. The department does not directly execute programmes but seeks to use state ownership in the economy to support the achievement these objectives. It is within this context that the BRR report concerning the Department of Public Enterprises by the Portfolio Committee on Public Enterprises is presented. 

1.4       Method

This report is a culmination the Committee’s engagement and interactions with the Department and the State-Owned Companies that report to it. This entailed a very intense and thorough analysis of the strategy and operations of the Department and its entities through briefings, oversight visits and interaction with relevant stakeholders.

These included a briefing from the Department of Public Enterprises on its annual report on 5 September 2017, a briefing from the Office of the Auditor-General of South Africa (AGSA) on the audit outcomes of the Department and its entities on 4 October 2017, and deliberations on the analysis done by the parliamentary support staff on the financial and non-financial performance of the Department and its entities. The report incorporates inputs from the Internal Audit unit of the Department of Public Enterprises.

1.5       Outline of the contents of the Report

The Budget Review and Recommendation Report (BRRR) of the Committee contains the following:

• Overview of the key relevant policy focus areas.
• Summary of previous key financial performance recommendations of the Committee.
• Overview and assessment of financial performance.
• Overview and assessment of service delivery performance.
• Financial and service delivery performance assessment.
• Committee observations and responses.
• Committee recommendations.

1. Overview of the key relevant policy focus areas

In 2012, the year in which the NDP was published, the decade-long upswing in commodity prices had begun to reverse, signalling deeper shifts in the global economy. The pace of Chinese industrialisation began to flag. World trade began to slow. A debt crisis broke out in Europe. Geopolitical tensions began to rise. Longer-term trends in developed countries – ageing populations, slowing productivity and widening inequality – became more pronounced. Imbalances in globalisation, stagnant incomes for the majority and a rising distrust of elites took centre stage in the global discourse.

Over the past year, these developments culminated in a series of political shifts in the US and Europe. These find expression in vociferous economic nationalism, rising disdain for multilateral institutions and increasing demands to tighten national borders. The policy direction of the new US administration, the outcome of the UK’s vote to leave the European Union, and elections in France and Germany contributed to global uncertainty, given that these developments directly involve four of the world’s largest economies.

South Africa’s development rests on a fair, rules-based global trading and financial system. The implications of recent international developments for South Africa’s economic trajectory need to be carefully considered. Over the medium term, pressure on the world economy is expected to increase. The resulting uncertainty is the single biggest risk to global economic recovery, with potentially severe consequences for South Africa.

The World Bank’s ninth edition of the South Africa economic update titled Private Investment for Jobs, analyzes the effectiveness and efficiency of investment tax incentives (ITIs) in various economic sectors. ITIs are one of several policy tools that the government has used to accelerate industrial development in the past decade to promote additional investment and job creation against the shortcomings of a commodity-driven growth model. The report suggests that sectors which would benefit from reoriented incentives also enjoy the largest employment multipliers, and would thus amplify the impact of incentives on job creation.

Job creation is one of South Africa’s fundamental goals, with the country’s National Development Plan (NDP) targeting the creation of 11 million jobs to reduce the high unemployment rate to 6% by 2030, and to significantly reduce poverty and inequality. To meet this target, it is estimated that the economy would have to produce at least 600,000 new jobs on average, annually. However, the report reveals that the pace of job creation in the past decade has been too slow with about 310,000 jobs having been created on average every year; 265,000 by the private sector, and about 50,000 by the public sector between 2005-2015. The unemployment rate in South Africa was 27.7% as at the third quarter of 2017 and remains at record high levels last seen in 2003.

The Budget Review 2017 indicated that over the medium term, economic growth is projected to improve moderately on the strength of several developments:

• The real exchange rate has depreciated, boosting competitiveness.
• An uptick in commodity prices is expected to carry through into 2017.
• The severe drought has eased in several farming regions.
• Electricity supply has stabilised.
• Improved labour relations are expected to boost job creation.

Government, working with business, labour and civil society, can act decisively to boost investment in the short term by:

• Finalising the Mineral Resources and Petroleum Development Amendment Bill, and legislation on land holdings and security of tenure. Certainty will promote investment in mining and agriculture.
• Concluding the transition from analogue to digital television signals, and allocating new spectrum to broadband services. Cheap and reliable internet will lower costs and create business opportunities for new entrants. It can also provide a platform to expand health and education services in remote areas.
• Expanding the independent power producer programme in renewables and gas. An expansion that provides certainty to investors can open up substantial opportunities for black-owned firms, create thousands of jobs and boost power supply.
• Ensuring that the state performs its economic regulatory functions effectively. For example, speeding up the verification of black empowerment credentials and local content requirements would support transformation and local manufacturing.
• Reinforcing South Africa’s commitments to global standards in financial sector regulation. South Africa needs to maintain its position as an investment destination, supported by a sophisticated business and financial sector, and adherence to international standards.
• Safeguarding the country’s investment-grade credit rating.
• Maintaining a sustainable, realistic fiscal framework that promotes transformation, a stable labour relations environment and reliable electricity supply will go a long way to reduce risk perceptions.
• Addressing shortcomings in state infrastructure planning and execution.
• Establish a new financing facility for large infrastructure projects.

South Africa’s projected GDP growth for 2017, forecast at 1.3% at the time of the 2017 Budget, has been revised down to 0.7%. GDP growth is expected to increase slowly, reaching 1.9% in 2020. Relative to the 2017 Budget projections, debt-service costs will be R1 billion higher in 2017/18, R2.4 billion higher in 2018/19 and R6 billion higher in 2019/20. By 2020/21, government projects that nearly 15% of main budget revenue will go toward servicing debt. This crowds out the space to fund social and economic priorities.

2.1 Inclusive Growth

Since 1994, South Africa has been guided by the Constitution’s call to heal the divisions of the past and establish a society based on democratic values, social justice and fundamental human rights. The country has made much progress in these areas. But too little has changed in the structure of the economy and patterns of wealth accumulation. Inclusive growth requires broad-based transformation to break down structural impediments to new economic activities, deconcentrate industries dominated by few participants, accelerate the inclusion of millions of black South Africans into jobs and businesses, and return to a path of rising per capita incomes for all. The changes needed to achieve this are set out in the NDP. These include:

• Improving education and skills development, starting with a more effective basic education and early childhood development sector.
• Strengthening competition laws to address skewed ownership and control, which is a barrier to business entry and the expansion of key markets that are essential for job creation.
• Increasing private-sector participation in sectors dominated by public enterprises, and ensuring that effective regulatory authorities curb the power of monopolies.
• Providing support and incentives for labour-intensive sectors, including agriculture, agro-processing and tourism.
• Overcoming the spatial fragmentation of South Africa’s cities, so that people have easier access to jobs and infrastructure.

The World Economic Forum identified seven pillars for the inclusive growth and development framework:

• Pillar 1: Education and Skills – Access, Quality and Equity
• Pillar 2: Basic Services and Infrastructure – Basic and Digital Infrastructure and Health Related Services and Infrastructure
• Pillar 3: Corruption and Rents – Business and Political Ethics and Concentration of Rents
• Pillar 4: Financial Intermediation of Real Economic and Investments – Financial System Inclusion and Intermediation of Business Environment
• Pillar 5: Asset Building and Entrepreneurship – Small Business Ownership and Home and Financial Asset Ownership
• Pillar 6: Employment and Labour Compensation – Productive Employment and Wage and Non-Wage Ownership
• Pillar 7: Fiscal Transfers – Tax Code and Social Protection.

SOCs are central in contributing to this framework. The Department must develop a policy mechanism to institutionalise the framework in order to improve performance in SOCs with the objective of achieving economic growth and social inclusion.  

2.2 Economic transformation through preferential procurement

Revised preferential procurement policy regulations took effect on 1 April 2017. The following changes aim to enhance transformation:

• Tenders can be targeted to empower specific groups, such as black women.
• Bids up to R50 million will be evaluated in terms of the 80/20 preference point system (the previous threshold was R1 million), which will help smaller, black-owned firms to compete.
• Public entities will be allowed to negotiate prices and value for money with preferred service providers.
• Procurement of locally manufactured goods will be supported.
• Preference points will be allocated in line with broad-based black economic empowerment status.
• Compulsory subcontracting of at least 30% for tenders above R30 million will be implemented, where feasible, to advance designated groups.

These changes in policy and regulations have implications for the Department and the SOCs as they are linked to the transformation targets of government. It is imperative that these changes are integrated in the annual performance plan of the Department and the corporate plans of the SOCs to advance the objectives of government on localisation, small business development and broad-based black economic empowerment.

2.3 Key Policy Focus for the Department of Public Enterprises

The Department of Public Enterprises oversees six state-owned companies: Alexkor, Denel, the South African Forestry Company, Eskom, South African Express Airways and Transnet. These companies are key drivers of economic growth over the short and medium term. The department monitors state-owned companies to ensure that the right investments are made to create jobs and sustain economic growth. In delivering on its mandate, the department contributes to the NDP objectives as expressed in outcome 4 (decent employment through inclusive growth) and outcome 6 (an efficient, competitive and responsive economic infrastructure network) of government’s 2014-2019 medium-term strategic framework. The department’s focus over the medium term is on strengthening its oversight capacity and ensuring that state-owned companies under its authority are contributing to investment in key infrastructure.

This is a reaffirmation on how Government’s infrastructure programme will support the growth of supply sectors, unlock key bottlenecks in the economy and underpin structural transformation. The Strategic Infrastructure Projects (SIPs) identified in the Presidential Infrastructure Coordinating Council (PICC) in which State-Owned Companies are leading will have a catalytic impact on job creation, unlocking resources developing the poorest regions of our country and overcoming spatial inequalities. The SOCs have a regional outlook informed by government’s commitment to the African Union on the key Strategic Infrastructure Projects. The Department provides oversight to these entities to deliver on the developmental objectives of government and to ensure that they are commercially viable. SOCs contribute continental developmental objectives as part of government’s commitment to the AU’s Agenda 2063.

2.4 Key Policy Developments and Legislative Changes

In its 2015/16 annual report, the Department outlined that the Shareholder Management Bill is at its advanced stages and will be presented to Cabinet before being introduced to Parliament. However, the report indicated that there were no policies or legislation that affected the departmental operations during the year under review. The Department did not meet its objective of introducing the Shareholder Management Bill to Parliament as outlined in last year’s annual report.

The Department exercises shareholder oversight over six SOCs. All the SOCs are incorporated as companies in accordance with the provisions of the Companies Act, 2008. All the SOCs with the exception of Denel, are established in terms of their own enabling legislation which sets out the purpose, mandate and objectives for which they are founded.

The Department is the administrator and custodian of all legislation relating to the establishment of SOCs. In terms of section 63(2) of the Public Finance Management Act, No. 1 of 1999, as amended (the PFMA), the Minister of Public Enterprises has, inter alia, the responsibility of ensuring that SOCs comply with the PFMA. In the financial year 2016/17, there were violations of the PFMA by some of the major SOCs which were reported in their audit findings.

3. Summary of PREVIOUS BRRR recommendations of the Committee

Based on the analysis of the department’s budget for the year 2015/16, the following recommendations were made:

3.1       The Committee Recommended that the Minister of Public Enterprises should:

3.1.1    Ensure the capacitation of the internal audit function in the Department and state-owned companies to ensure an improved record keeping and compliance with the legislative framework.

3.1.2    Consider introducing relevant systems as well as considering evidential requirements during the annual strategic planning process in order to ensure that all predetermined targets are achieved and that targets are realistic and achievable.

3.1.3    Increase and strengthen oversight over state-owned companies through robust and regular interaction with CEOs, Board Members, Audit Committees, regular visits to the construction sites of major infrastructure projects as well as to offices and sites of the entities.

3.1.4 Ensure that emphasis is placed on monitoring and evaluation, so that the SOCs’ implementation of Government’s policy objectives is realised, especially their outcomes as this has an impact on peoples’ lives.

3.1.5    Fast-track the introduction of the Shareholder Management Bill which will empower the department to carry out its oversight responsibilities over state-owned companies more effectively, especially in providing guidance on how to align SOCs’ strategic priorities with government policies.

3.1.6    Provide the Committee with shareholder compacts signed with state-owned companies in order to enhance the oversight role of the Committee, within one month after the signing of the agreement.

3.1.7    Institutionalise the recommendations of the Presidential Review Committee on SOCs and work with the Ministerial Committee, headed by the Deputy President looking into the SOC’s and the Department.

3.1.8    Ensure that the guiding frameworks for SOCs are completed timeously and implemented so as to provide a stable working environment. The Department should ensure that the SOCs comply with these frameworks.

3.1.9    Ensure that there are punitive measures in place for under-performance against targets for board members, executives, contractors of SOCs and officials of the department.

3.1.10 Ensure that all the SOCs undertake interim audits, as most of them got unqualified audit opinions with findings.

3.1.11  Ensure that the Department of Public Enterprises closely monitors South African 

           Express Airways in the implementation of the turnaround strategy.

3.1.12  Ensure that the Department of Public Enterprises should introduce mechanisms that would ensure SOCs implement the recommendations of the department.

3.1.13  Ensure that the Department finalises the future strategic roles for Alexkor and

           Safcol.

3.1.14  Ensure that the vacancies in the department are filled, as well as the acting positions in the entities with an outcome of developing the strategic capacity of the Department.

3.1.15  Pursue the finalisation of the Whole of State policy to bring alignment and synergy among state aviation assets, i.e. SAA, SAX and Mango.

3.1.16  Ensure that the Department continues to work closely with policy departments such as the Departments of Transport, the Department of Mineral Resources, the Department of Energy, the Department of Defence and Military Veterans and the Department of Agriculture, Forestry and Fisheries, in order to influence the policy environment in which the SOCs operate.

3.1.17 Ensure that there are time frames to rectify the shortcomings as identified by the findings of the Auditor-General be set and given to the Committee.

3.1.18 Complete the objective on Business Mapping Process.                                                           

3.1.19 Ensure that service providers are paid within timeframes and project management capacity is enhanced in the department.

3.1.20 Ensure that spending on compensation is fast tracked through acquiring critical skills.

3.1.21 Address issues relating to SOCs with going concern issues.

3.2       The Committee recommended that the Minister of Finance:

3.2.1 Should consider clarify issues relating to the Eskom coal contract and provide guidance in terms of actions that should be followed.

1. Should provide clarity regarding Denel Asia and provide the best course of action.

To date, the Committee has not received responses to these recommendations either from the Minister of Public Enterprises or the Minister of Finance.

1. Overview and assessment of financial performance

The Department spent 94.7% of its budget in the 2016/17 financial year, and received an unqualified audit report with no findings. However, the 2017 BRRR of the Department is tabled under serious economic pressures and poor financial governance experienced in critical SOCs under the oversight of the Department. If the financial and governance risks identified in the SOCs remain unchanged, they will significantly contribute to the collapse of the South African economy.

In engaging with the Department’s and SOCs performance reports, the Committee notes the following main risks to the medium-term fiscal and economic outlook as reported in the 2017 Risk Statement published by National Treasury:

Table 1: Summary of Risks to the Economy and Fiscus 

 Adapted from National Treasury, 2017 MTBPS

Several state-owned companies persistently demonstrate operational inefficiencies, poor procurement practices, weak corporate governance and failures to abide by fiduciary obligations. State-owned companies that have been able to roll over maturing debt have done so on an increasingly unsustainable basis, with shorter repayment terms, higher interest rates or reliance on government guarantees. Several lenders have declined to roll over debt falling due and required settlement. The contingent liability risks are rapidly becoming a reality.

Table 2. Overview of Vote allocation and spending (2012/13 to 2016/17) R’million

Source: Department of Public Enterprises (2017)

As shown in Table 2, of the five years shown above, the DPE has underspent by more than 5% for three of these years.  The reason given for the under spending in the 2013/14 and 2014/15 financial years was mainly due to delays in the filling of vacant posts and delays in projects that have not yet commenced and other projects that still needed to be completed.  The under expenditure of R14.2 million in the current year similarly is also due to vacancies which are as a result of the re-alignment of the organisational structure.[1] The R23.3 billion adjusted budget in 2015/16 was due to the R23 billion Special Appropriation for the recapitalisation of Eskom during that financial year.  During the 2012/13 financial year, the Department received R350 million for Alexkor to settle outstanding unfunded obligations under the Alexkor/Richtersveld community deed of settlement, including the tax obligation of R69.9 million, while R700 million was allocated to Denel for the recapitalisation of Denel Aerostructures.  No monies were transferred to the entities during the 2013/14, 2014/15 and 2016/17 financial years.

The department was allocated R274.0 million at the beginning of the 2016/17 financial year.  The budget allocation decreased by R6 million during the Adjusted Budget Appropriation in October 2016.  Of the allocated budget of R268 million, R253.8 million was spent, resulting in an amount of R14.2 million or 5.3% not being spent. The unspent balance of
R14.2 million will be surrendered to the National Revenue Fund (NRF).[2] 

4.1 Financial performance 2016/17

Table 3. Quarterly Expenditure for the 2016/17 financial year

Source: Department of Public Enterprises (2017)

• Expenditure Management: Effective steps were not taken to prevent irregular expenditure amounting to R3.1 million, as required by section 38(1)(c)(ii) of the Public Finance Management Act and Treasury Regulation 9.11.

With regard to the Internal Control environment, the AG highlighted Leadership as an additional matter, stating that the Accounting Officer did not exercise adequate oversight responsibility regarding financial reporting and compliance and related internal controls.

The Department was able to correct the above findings during the 2016/17 financial year, and received an unqualified audit with no findings.  The Departments audit is done by the Auditor-General of South Africa.

4.2 Entities

The Department’s overall objectives are to provide an effective shareholder management system and to support and promote economic efficiency within each of the state-owned companies (SOCs).  The performance of SOCs has been varied in the period under review.  It is also important to note that the economic environment under which SOCs operate has been negative.

The financial performance is evidenced by the service delivery done by the entities and enumerated in section 5.  Section 5 highlights the performance of the entities in relation to their financial performance.

4.2.1 Alexkor

The entity reported a net profit of R31 million, an improvement on the loss it reported in the previous year.  Consolidated revenue increased from R197 million in 2016/17 to R386 million in the 2016/17 financial year.  Alexkor commissioned deep sea operations during the 2016/17 financial year, which improved carat production to over 162 000 carats being produced, compared to 45 000 carats produced in the previous financial year. The commissioning of the deep sea mining operations improved the performance of the joint venture significantly.[3]    

During the 2015/16 financial year, the entity continued to receive an unqualified audit opinion, an emphasis of matter was raised and numerous new findings were contained in the auditors’ opinion for 2015/16.  The emphasis of matter related to the financial statements being done in accordance with International Financial Reporting Standards (IFMS) and did not adhere to the Public Finance Management Act although the entity received approval for this from the National Treasury.  With regards to Compliance with legislation, the AG highlighted procurement and contract management, expenditure management, and consequence management.  With regards to Internal Control the audit highlighted issues relating to leadership.

During the 2016/17 financial year, the entity received an unqualified audit opinion with findings.[4]  The entity seemed to have regressed from the previous’ years findings, as additional matters were raised concerning its pre-determined objectives which was not raised in the 2015/16 financial audit.  The entities audit was undertaken by Sizwe Ntsaluba Gobodo (SNG).

4.2.2 Denel

The entity is exposed to high contingent liability risk. Under the period under review, Denel was unable to repay the government-guaranteed debt amounting to R1.85 billion. The main attribute to the failure to meet the set repayment deadline, was governance crisis and corruption. The malpractices at Denel forced government to extend the repayment period to 30 September 2018.

Revenue decreased slightly from R8.2 billion in 2015/16 to R8.1 billion in 2016/17, due to most programmes moving from development into production phase, resulting in increased activities.  In line with this, the entity’s profit decreased from R395 million in 2015/16 to R334 million in 2016/17, although accumulated profits have not translated into cash in the bank.  High costs of production, high levels of work in progress and finance costs have contributed to the low net profit levels.[5]

Denel’s assets are mainly financed by debt, which consists of government secured debt of R1.85 billion and unsecured debt.  Liquidity challenges have resulted in the entity relying on prepayments to fund working capital requirements. 

According to the Auditor-General (AG) of South Africa, during the 2016/17 financial year, the entity received an unqualified opinion with findings on its compliance with laws and regulations.[6] However, there is a dispute between Denel and the AG on the audit opinion. In a Committee meeting with the AG on the Department’s and SOCs audit outcomes, the AG revealed that they had appointed Sizwe Ntsaluba Gobodo (SNG) as Denel’s auditors.  During their review of SNG’s audit opinion, they were of the opinion that the audit should include a finding on the entity’s irregular expenditure.  When SNG committed this to Denel, they met resistance from Denel executives to change the audit opinion.  Denel subsequently published the incorrect audit opinion, which was tabled in Parliament. The Office of the AG then tabled a formal letter to the Committee that informed the Committee that the financial statements that were tabled by Denel were the incorrect ones, as the company refused to effect amendments made by the auditors before adoption of the report.  The Committee resolved to have a meeting with the AG, Denel and the Department to clarify this matter, as it was very concerning that an entity does not comply with a Chapter 9 institution.  This event has called into question the standard of the audits done at government institutions. 

Denel had to dissolve the establishment of Denel Asia which it established in 2015 without the approval of the Minister of Finance.    Denel established Denel Asia, a joint venture with VR Laser Asia, in order to take advantage of the eastern defence market, which is in a growth phase.  This incident caused reputational damage to the entity, and called into question the integrity of the board, specifically that of the Board Chair, Mr Dan Mantsha, and executives at Denel.  This has prompted the Committee to include Denel in its inquiry into the governance of SOCs.  The Committee will specifically look into the establishment of Denel Asia, the appointment of board members and executives, and any other related matter the Committee feels it needs more clarity on.

4.2.3 Safcol

The South African Forestry Company (Safcol) had a challenging year in 2015/16, given that a completely new board was appointed to the entity, with both its Chief Executive Officer and its Chief Finance Officer leaving their posts in December 2016.  The entity was also investigating allegations of the possible misappropriation of the entity’s assets, the case has now been reported to the South African Police Department.  Financially the entity incurred an operating loss of R125 million due to the restatement of minority shareholdings (non-current assets held for sale), and property, plant and equipment.

During the 2016/17 financial year, the entity is still struggling with instability at management level with the entire Executive Committee positions vacant.  The company was also unable to meet any of the strategic targets as agreed in the 2016/17 shareholder compact.  Despite this the entity was able to grow revenue to R1 billion, the highest in five years.  This 14% growth in revenue is due to increased selling prices and volume of logs.  This resulted in SAFCOL reporting an operating profit of R123 million and net profit of R107 million for the year.[7] 

Safcol is still overseeing Industrias Florestias de Manica (IFLOMA), its Mozambique subsidiary, which is still under care and maintenance, its future is still under discussion at Safcol. Safcol is currently implementing its own turnaround strategy. Safcol is still struggling to operate on land that is affected by land claims, which affects 61% of the land Safcol operates.

In the 2015/16 financial year, Safcol received an unqualified audit opinion with findings from the Auditor-General.  However, the entity has regressed during the 2016/17 financial year, receiving a qualified audit on its financials with material findings on its pre-determined objectives and compliance with laws and regulations.[8]

4.2.4 Eskom

During the 2014/15 financial year, Eskom continued to face multiple challenges.  These challenges included the constrained electricity system, the maintenance backlog and ageing infrastructure, the funding shortfall created by the Multi-Year Price Determination (MYPD3) as well as low electricity tariffs, the increased cost of generating electricity, the delays in the new build programme and an uncertain future regarding new generation.  In November 2014, Eskom developed a Turnaround Strategy to apprehend the operational and financial decline and stabilise the business. Since then Eskom has managed to stabilise the business by improving plant performance, minimising the risk of load shedding, maintaining their liquidity position and improved the financial performance. 

However, the 2016 financial year has been marred by controversy for the entity.  This includes the sudden resignation, and then reappointment of the Chief Executive Officer (CEO), Mr Brian Molefe; the suspension of the Acting CEO, Mr Matshela Koko; the suspension of the Chief Financial Officer, Mr Anoj Singh; and the mass exodus of Eskom non-independent board members, where 5 board members resigned during the year.  This was then followed by Eskom’s board chair, Mr Baldwin Ngubane, resigning form the board on 12 June 2017. 

Not only does the entity face leadership, governance and reputational damage due to the above circumstances, the entity received a qualified audit opinion based on that fact that Eskom could not adequately identify and recognise all irregular expenditure.[9] Consequently, the auditors were unable to determine whether any adjustment was necessary to the balance of irregular expenditure stated at R3 billion in the financial statements.  The entity’s audit was undertaken by SNG as well.

The tariffs increase request by ESKOM need to be observed critical taking into account poor financial governance experienced at the entity. Furthermore, any unjustified tariff increases under the current governance crisis in SOCs, low economic growth environment would bite industries and households. Most important step that need to be taken: restore governance at ESKOM. Tariff increases cannot be used to cushion ESKOM against ‘self-inflicted’ poor governance decisions and malpractices. The increase on tariffs could have significant fiscal implications, and further affect the entire economy.

What does it mean of ESKOM in failing to signed take-off agreements with the Independent Power Producers? This would invite NERSA to issue penalties against ESKOM, and thus erode the revenue, and increase reputational risk. Furthermore, it would have a negative effect on the following objectives:

• Create new jobs and attracting investment,
• Stimulate national and regional economies, building industrial base for local economic development,
• Partnership with other industry players such as higher education, SMMEs, and supporting broader economic and social development initiatives
• Help the environment (through cost effective carbon pollution reduction and the potential for energy resilience as the climate changes), 
• Deliver customer and government value, and
• Allow for efficient operation of the energy market, thus there is a need to create competition in the electricity industry. 

Profitability of ESKOM should not trump other government strategic policy goals. Government needs to remove any existing policy and regulatory barriers that affect the development of the renewable energy industry. The renewable energy industry should be used to maximise/leverage broader government support programmes to support regional economies and add to lift employment, and poverty reduction initiatives. Government need to protect private sector investment in small and large scale renewable projects.

4.2.5 Transnet

The entity’s focus for the 2016/17 year was on the continued implementation of the Market Demand Strategy (MDS).  Transnet was able to achieve R21.4 billion capital investment for the year in the context of weak economic fundamentals. Despite the steep fall in commodity prices, stagnant global and domestic economic growth and a significant decline in customer demand, Transnet was able to achieve aggregate volume performance of 95%, an increase on the 90.3% achieved in the prior year. Transnet continued to demonstrate financial stability during the year, enabling it to continue the execution of the MDS, although at a slower pace due to the global economic slowdown.[10]

Yet Transnet failed in 2016/17 to meet approximately 48% of the performance targets it had set itself, a further deterioration, as it failed to achieve 42% in the previous financial year. The Auditor-General found that the performance indicators themselves were not well defined, specific and measurable.  This is the same finding highlighted in the 2015/16 financial year.[11]

Transnet received an unqualified audit with findings on their predetermined objectives and on compliance with laws and regulations. With respect to compliance with laws and regulations the audit found that no effective and appropriate steps were taken to prevent irregular and fruitless and wasteful expenditure, with amounted to R922 million and R21.9 million respectively.[12]   The entities audit is undertaken by SNG.

The South African economy has been characterised by high levels of economic concentration, some of the public state entities continue to enjoy dominance positions in various industries. 2016 Budget review emphasised that competition should be promoted in various industries in the economy, and thus would improve efficiency and competitiveness and further increase investment levels, entrepreneurship and employment. To this end, there is a need to accelerate implementation of the National Commercial Ports Policy, 2002 and the National Ports Act, 2005 including the National Freight Logistics Strategy, 2005. The policies advocate for new institutional framework to separate the Ports Authority and Ports Terminals from the Transnet Group, to enhance competition in the ports, and furthermore boost private sector participation. Over the medium term, the Committee would need to pay particular attention that this policy initiative is implemented.

4.2.6 South African Express Airways

At the time of tabling the Budget Review and Recommendations Report for 2017 the entity had not as yet tabled their 2016/17 Annual Report to parliament due to the fact that the status of “going concern” could not be guaranteed.

During the 2016 financial year the airline was granted an extension of an existing guarantee of R539 million and R567 million, which allowed them to table the 2015/16 Annual Report and Financial Statements.

During the 2015/16 financial year, the entity received revenue amounting to R2.39 billion,
7% less than the revenue of R2.59 million received in the 2014/15 financial year, in line with a 7% drop in passenger numbers.  Due to the company’s Cost Containment and Revenue Enhancement Programme, the company declared a net profit of
R16.9 million after tax.[13]   

The entity received a qualified audit opinion on the financial statements with material findings on their pre-determined objectives and compliance with laws and regulations, from the Auditor-General.[14]

The Committee has raised serious concern regarding the performance of SAX, especially due to the “going concern” issues the entity has faced, and the inability of the entity to table its financial statements to Parliament by 30 September each year.  The entity has not been able to table their annual reports timeously since the 2012/13 financial year.  The issue regarding the merger of SAA, SAX and Mango needs to be resolved as a matter of urgency. 

4.3 Department of Public Enterprises’ financial performance for 2017/18

The Department had a total budget of R266.7 million for the 2017/18 financial year of which R58.5 million or 18.2% has been spent for the period April to June 2017.  This is lower than the projected expenditure of R60.4 million for the first quarter.  This compares favourably on the R54.3 million or 19.8% spent in the first quarter of the previous financial year. 

The majority of the Department’s budget is spent on compensation of employees and Goods and services.  Of the R166.9 million budgeted for compensation of employees, R34.2 million or 22.5% has been spent, lower than the projected R39.7 million due to unfilled vacancies.  An amount of R96.9 million has been allocated for Goods and Services, where R13.9 million or 14.3% was spent in the first quarter against a projected spend of R18.8 million due to lower expenditure on line items associated with the slow filling of vacancies.

The majority of the budget was spent on the programme Administration.  The programme has an appropriated budget of R155.5 million (58.3% of the total budget), of which
R30.2 million or 19.4% was spent, compared to the R30.4 million or 19.3% spent in the first quarter of the previous year.  The main cost drivers in this programme are compensation of employees, consultants and travel and subsistence.[15]

Programme 2 Legal and Governance was allocated a budget of R25.2 million, of which
R4.2 million or 16.7% was spent in the first quarter. This compares favourably with the R4.1 million or 17.3% spent in the first quarter of the previous financial year.  The main cost driver within the programme is compensation of employees, and travel and subsistence.  The programmes also spends significantly on consultants and is mainly driven by legal assistance from private firms for matters pertaining to the state owned companies.[16] 

Programme 3 Portfolio Management and Strategic Partnerships was allocated a budget of R86.0 million of which R14.0 million or 16.3% of the budget was spent by the end of June 2017, compared to the R18.8 million or 15.3% spent in the same period in the previous year.[17]  The main cost drivers in the programme are compensation of employees, travel and subsistence and consultants mainly for projects which are run for effective oversight of state owned companies. 

As at 30 June 2017, the Department has a headcount of 189 which translates into a vacancy rate of 14.1%.  While vacant posts are spread across all programmes, the programme Administration has a vacancy rate of 13.7%, Portfolio Management and Strategic Partnerships had 14.5% and Legal and Governance has 15%.  The Department has been advised by the National Treasury to expedite the filling of posts especially on the Portfolio Management and Strategic Partnership programme which is core.  The National Treasury advised that the Committee note that the Department is carrying out an organisational realignment process which is targeted to be effected by April 2018.  Filling of vacant posts was put on hold due to the Departmental realignment process. 

4.4       MTEF financial allocations for 2018/19

Table 4. Current Estimates for the 2018/19

Source: Department of Public Enterprises (2017a)

As seen above in Table 3, the projected allocation for the 2018/19 financial year amounts to R277.2 million, a R10.5 million or 3.4% increase.  Programme 2: Legal and Governance sees the biggest increase of nearly 5.0% from R25.2 million in 2017/18 to R26.4 million in 2018/19. Programme 1: Administration is projected to increase by 4.5% while Programme 3: Portfolio Management and Strategic Partnerships increases by 2.7%.

This proposed allocation is subject to confirmation and approval by the Minister of Finance during the National Budget in 2018.

The Department has not submitted any additional requests for funding during the 2017 Medium Term Expenditure Framework budget process. 

4.5 Concluding comments on financial performance

The Department is financially sound as exhibited by achieving unqualified audit opinions for the last eight years.  However, actual expenditure tends to lag behind planned expenditure in the first two quarters of the year.  This is only corrected once the Adjustment Budget is tabled in November.  The reasons given for actual expenditure not meeting planned expenditure include vacant posts due to specialised skill requirements and delays in executing project plans. The Department should try to correct this trend by looking at its planning mechanisms.

Performance against expenditure is addressed in section 6 of the report, however, the Department will have to strengthen its oversight over Eskom and engage on the best way for Eskom to utilise the yearly increase in electricity tariffs.  Implementation of the South African Express turnaround strategy has to be monitored to ensure the desired results by the shareholder.  The Department will have to maintain close oversight over Transnet’s implementation of the market demand strategy.  The future role of Alexkor and SAFCOL will have to be clarified as they work towards stabilisation in their long-term planning.  Denel will have to continue implementing the turnaround strategy to build on the progress they have made during the 2015/16 financial year.  Denel will have to overcome the reputational damage incurred during the Denel Asia saga as well as address allegations against the Board Chairman.  

The Department must provide the appropriate support to the SOCs to overcome the audit findings of 2016/17 in preparation for the 2017/18 financial audit.  Correction measures and plans need to be put to place to address the audit findings.  The Department needs to ensure that processes and procedures are put in place to address entity weaknesses timeously and effectively and efficiently before these issues escalate and become major risks to our sovereign stability.

5. Overview and assessment of service delivery performance

5.1 Service delivery performance for 2016/17

The Department of Public Enterprises provides a distinct mandate of SOCs’ shareholder oversight on behalf of the State. The Department’s mandate is to fulfil oversight responsibilities at these state-owned companies to ensure that they contribute to the realisation of government’s strategic objectives, as articulated in the National Development Plan (NDP), the medium-term strategic framework (MTSF), the new growth path and the industrial policy action plan. State-owned companies are crucial to driving the state’s strategic objectives of creating jobs, and enhancing equity and transformation. The Department’s contribution towards government priorities and outcomes is done through three programmes identified in the organisational structure namely: administration, legal and governance; and programme management and strategic partnerships. The section below discusses programme performance.

1.  Performance Information by Programme

5.2.1 Programme 1: Administration

1. Purpose

Provides strategic management, direction and administrative support to the Department, which enables the Department to meet its strategic objectives.

The programme includes the Ministry, the Office of the Director-General and Support Services. The programmes currently comprises the following sub-programmes: Ministry; Corporate Services; the Chief Financial Officer; Human Resources; Communications; Strategic Planning, Monitoring and Evaluation and Inter-Governmental and Internal Relations and Internal Audit.

1. International Relations

The Department successfully coordinated the Minister’s working visit to Kenya where a Memorandum of Understanding (MOU) was signed on the LAMU Port (Transnet and Mwalimu Ltd). Working visits were undertaken to Vietnam to explore opportunities in the aqua-culture and shipbuilding industries. Visits were also undertaken in Singapore to look at SOCs management, PPPs and the Special Economic Zones during the year under review.

In addition, visits were undertaken to United States of America to benchmark the efforts of the

Department with international best practice in information technology-driven design and innovation. Bilateral engagements were also held with the senior leadership of the key stakeholders in business and government in order to strengthen the partnership between the two countries and to unlock opportunities for SOCs. Furthermore, the Department participated in the BRICS SOC Summit, hosted by the Government of India, to establish a platform of sharing experiences and knowledge in the oversight of SOCs.

1. Information Management

The Department enhanced its IT infrastructure during the period under review. Among those is

“Skype for business” project that has been deployed. This has been in response to the need to enhance efficiencies with the Department and to respond to government’s call to curb expenditure relating to travel and accommodation, in light of the prevailing economic conditions. In addition, the Department upgraded its server, fibre data lines from 4 to 20 megabits per second (Mbps), and internet line from 4 to 10 Mbps. These achievements will enhance the Department’s accessibility to public and will enable ease of communication with stakeholders.

1. Strategy to overcome areas of under performance

Key milestones in the four projects were achieved in the period under review. The SharePoint project is already in the testing phase and therefore, progress registered to date indicates that all four systems will be fully implemented in the 2017/18 financial year. Furthermore, the four projects have been disaggregated in order to ensure that each receives focused attention. Those aligned to relocation of the Department’s offices and re-alignment of the organisational structure are addressed within the domain of external factors that may impact their delivery.

1. Committee Observations

The Committee observed that while there is recorded achievement on international relations, there is nothing reported with regards to key initiatives which followed as a result of the visits. The Department does not outline if the visits form part of South African government policy objectives on international relations. These visits should be quantified in realizable objectives for the Department and State Owned Companies (SOCs). The Department embarked on a review of its APP targets. It reduced its strategic objectives from five to four due to budget constraints. Out of its two identified strategic objectives, the Department achieved one in this programme. No achievement was recorded on strengthening and enhancing internal process flows and systems. Achievement was recorded for the support service delivery through implementation of the Inter-Governmental engagement and programme. The strategic objectives identified do not consider sub-programmes identified by the Department in its programme overview. Therefore, there’s no golden thread provided between the setting of strategic objectives, performance and expenditure.

The role of sub programmes on Corporate Management, Chief Financial Officer (CFO), Human Resources, Communications, Monitoring and Evaluation and Internal Audit should form part of the broad Departmental planning framework. Managerial roles are found in human resources, information technology, and finance. In this regard more emphasis should be placed on policy development framework to execute the Department’s mandate which primarily is to provide oversight to SOCs. Most of the Department’s policies are governed by MOI and shareholder compacts.

The Department should clearly outline its delegation framework and how decision are taken within the institution to ensure economy, efficiency and effectiveness of SOCs. Human Resources should also design personnel plans, develop performance agreements and evaluations, and design staff attraction and retention policies in order to mitigate the risk of losing critical skills. The role of communication should be strengthened through public education and awareness campaigns. It is critical that the Department use communication to inform communities, youth in particular about education and skills required to work within the public sector and SOCs environment. The Department should create policy, strategy and monitoring mechanism to ensure that SOCs play a role in empowering youth with the requisite skills to participate in industry. This should be done through social compacts with communities, organised labour and business. Communication should also be extended to small and medium enterprises, employment seeking graduates and organised labour. This sub-programme on communication has a role in inclusive development. Stakeholders can hold the Department and SOCs accountable through social contracts. This can lead to greater transparency, legitimacy and address structural challenges caused by apartheid.

The Chief Financial Officer role should be capacitated to also provide financial oversight beyond the scope of the Department. The role of the CFO should be developed to that of providing oversight to SOCs within the DPE. This should be done in alignment to policy and oversight activities in the programme on portfolio on management and strategic partnerships. This can be coordinated through a mechanism such as CFOs forum. This could be a platform for sharing of best practice, corporate planning and monitoring and evaluation for SOCs.

The Director-General has a role in ensuring that intergovernmental relations programmes which the Department is a participant are reported. This includes but not limited to participation in Cabinet, Cabinet Cluster on Economic Sectors, Employment and Infrastructure Development and any other forum that coordinates Directors-General. The current initiatives on SOCs such as the Inter-Ministerial Committee (IMC) on State Owned Entities reforms chaired by the Deputy President, who is responsible for overseeing the stabilization and reform of state owned entities should be aligned in the Department’s planning framework. The Department should play a role in the IMC particularly in the establishment of the Presidential SOCs Coordinating Council, which is intended for better oversight and coordination of state owned companies. The Department should also provide the Committee and progress reports on continual basis on these initiatives.

1. Programme 2: Legal and Governance

a) Purpose

Provide legal services and corporate governance systems, as well as facilitates the implementation of all legal aspects of transactions that are strategically important to the Department and SOCs, and ensures alignment with Government’s strategic intent.

The programme identifies three strategic objectives. The Department reports achievement on the following: strengthening the shareholder function and completion of the achievement of liquidation of Aventura. The programme did not achieve on the target of strengthening of risk management practices within the Department.

b) Committee Observations

The legal and governance programme does not sufficiently address challenges pertaining to the virtual absence of good governance principles in the SOCs. The Department should address challenges experienced by SOCs in their audit outcomes in its risk modelling tool. There is a need for the Department to sufficiently address issues related to regulatory environment of SOCs. The Department should work with the National Energy Regulator of South Africa (NERSA) in the determination of tariff setting with Eskom. The NDP states that the role and effectiveness of regulators needs to be reviewed. In addition to issuing licenses and setting tariffs, regulators need to place more emphasis on stimulating market competition and promoting affordable access to quality services. This will require capacity-building in regulatory institutions. The Department should find a mechanism to work with regulators that ensures SOCs’ inefficiencies do not lead to increase consumer household expenditure and increase to market inefficiencies.

The legal and regulatory framework within which SOCs operate is often complex. If it is not consistent and coherent it can easily result in costly market distortions and undermine the accountability of both management and the state as an owner. The Department should develop a clear division of responsibilities, a streamlining of legal forms together with a coherent and consistent regulatory framework that will facilitate the improvement of corporate governance in SOCs.

5.2.3    Programme 3: Portfolio Management and Strategic Partnerships

a) Purpose

To align the programme is to align the strategies of SOCs with government policy and strategy. It also aimed to align shareholder oversight with Government’s overarching economic, social and environmental policies, and build focused strategic partnerships between SOC, strategic customers, suppliers and financial institutions.

Sub-programme – Energy Enterprises

Shareholder management and oversight of the Eskom business, including the generation, transmission and distribution with particular emphasis on security of supply. Also provides strategic financial and transactional analysis of Eskom. The sub-programme reports that it has achieved on its targets on overseeing delivery of the build programme, support to reduce municipal and residential debt, monitoring improvement in Eskom’s operations to sustain supply of electricity and future role of Eskom in the Electricity industry.

South Africa’s electricity utility made headway on its capital expenditure programme over the past 24 months. One additional unit at Medupi power station and another at Kusile are expected to be in commercial operation by mid-2018, with the remaining units expected to be operating by 2022, adding 10.1GW of electricity to the national grid. Eskom’s financial performance improved in 2015/16 as a result of a 12.7% tariff hike, with revenue increasing by
10.5% to R161 billion. In addition, government’s R23 billion equity injection and the conversion of the R60 billion subordinated loan to equity, have shored up the balance sheet. Higher prices and containment of primary costs improved profitability. Earnings before interest, tax, depreciation and amortisation grew by 37.4% to R31 billion. Government has extended Eskom’s R350 billion guarantee from 31 March 2017 to 31 March 2023. The extension will allow the utility to use the remaining portion of the guarantee to complete its current capital expenditure programme through 2023. As at 31 December 2016, R187 billion of the R350 billion government guarantees had been utilised and it is expected that R218.2 billion will be utilised by 2016/17 year-end. Eskom increased planned borrowings in 2016/17 from
R46.8 billion to R68.5 billion. The increase results from Eskom’s revised assumptions of cost savings and lower-than anticipated tariffs during the current price determination period. From 2017/18, foreign loans are expected to account for 77.3% of Eskom’s total funding.

The scale of tariff hikes and recovery of municipal debt will affect Eskom’s financial position. The utility has appealed a High Court ruling setting aside the regulator’s decision to grant it a 9.4% tariff increase for 2016/17. As at 31 December 2016, municipal arrears to Eskom stood at R9.7 billion, 72% of which was owed by 20 municipalities.

Energy expenditure is expected to total R234.5 billion over the next three years, accounting for about 25% of total public-sector infrastructure spending. Eskom accounts for R203.8 billion, or 87%, of this amount.

Table 5: Eskom Capital Expenditure and Estimates

1. Grid projects involve installation of transmission lines, new transformers and upgrading of substations

2. Other represents a collection of projects to enhance the system at generation, transmission and distribution level including maintenance projects

Source: Eskom 2017

a) Committee Observations

The Department should develop strategies to monitor capital investment over the 3-year period. Municipal debt recovery strategies should be developed in partnership with the National Treasury and the Department of Cooperative Government and Traditional Affairs. An intergovernmental approach is required in consulting with the municipalities that are still in debt. The Department need to develop strategic objectives which address governance, procurement and financial sustainability in Eskom. The NDP states that the role and effectiveness of sector regulators need to be reviewed. It further states that in addition to issuing licences and setting tariffs, regulators need to place more emphasis on stimulating market competition and promoting affordable access to quality services. This will require capacity building in regulatory institutions. The Department together with NERSA should provide oversight to Eskom in executing its mandate in contributing to Outcome 4: decent employment through inclusive economic growth, Outcome 6: an efficient competitive and responsive economic infrastructure network, and Outcome 10:  environmental assets and natural resources that are well protected and continually enhanced.

During the 2016/17 financial year allegations of procurement irregularities have surfaced concerning Eskom.  These allegations include the following:

• Eskom’s alleged role in ensuring Tegeta was able to buy Optimum Coal Holdings;
• Eskom’s award of an estimated R11.7 billion coal-supply contracts at inflated prices to Tegeta Exploration and Resources (Pty) Ltd between 2015 and 2016;
• The R43 million contract with Media Company, TNA (Pty) Ltd;
• The R400 million contract with Trillian Capital Partners for management consulting and advisory services;
• Allegations of impropriety against the Acting CEO, Mr Matshela Koko, who awarded contracts amounting to R1 billion to Impulse International, of which his stepdaughter was a director.

The above allegations will form part of the Committee’s inquiry into Eskom.  These allegations have also thrown the cost at which Eskom is paying for coal into relief.  Questions has been raised regarding the cost of coal at Eskom.

Towards the latter part of the 2016/17 financial year, Eskom faced even more damaging allegations of shockingly poor governance and rampant abuse of state resources.  On 2 November 2016, the Public Protector of South Africa, Advocate Thuli Madonsela, published her full 'State of Capture' report in which Mr Brian Molefe, the then CEO of Eskom, was implicated in assisting the Gupta family in buying Optimum Coal Mine using his position as CEO at Eskom to influence the deal.  On 11 November 2016, Mr Molefe issued a statement stating, “I have, in the interests of good corporate governance, decided to leave my employ at Eskom from 1 January 2017.”  Essentially, it seemed to the public that Mr Molefe had resigned from his position as CEO of Eskom.  On 23 February 2017, Mr Molefe was sworn in as a Member of Parliament for the African National Congress (ANC). 

On 12 May 2017, the Eskom board confirmed that Mr Molefe would return to Eskom as CEO following a dispute about his pension payout. Mr Molefe’s resignation as a Member of Parliament was confirmed on 12 May 2017, effective from 14 May 2017.  Questions were raised about a R30 million payout after Mr Molefe resigned as CEO in 2016.  In a statement by the Minister of Public Enterprises she stated that “after considering various options, the Board proposed that Mr Molefe returns all monies received on his departure from Eskom on 1 January 2017 and is reinstated as Group Chief Executive with immediate effect.”  The reason given for his reappointment was that Mr Molefe had erroneously taken early retirement and upon realising this mistake, the board had rescinded his early retirement. There was a huge public outcry about the R30 million payout and the process leading to the reinstatement of Mr Molefe.  However, subsequent to the above reappointment of Mr Molefe, on 31 May 2017, the Minister of Public Enterprises directed the Board of Eskom to rescind its decision to reinstate Brian Molefe as CEO. 

The Committee then held a meeting with the Eskom board on 23 May 2017 to receive a briefing on the following:

• The process followed in the reappointment of the former Group Chief Executive Officer (GCEO);
• The determination of retirement package by the Board of Eskom.

However, the Committee was not satisfied with the explanations provided and resolved to include this matter in its inquiry into the governance of SOCs.  As stated above, this process started on 17 October 2017. 

The Committee is also concerned with the sustainability of Eskom given that they have been designated to roll-out the country’s nuclear programme.  The Committee is concerned that this will place a further strain on the company’s financial sustainability.  The announcement by Eskom’s CEO that they will not be signing any further Independent Power Producer agreements in 2016 due to the cost burden on the country needs to be addressed.  The company states that the cost of the IPPs is more expensive than coal-generated electricity and therefore would not consider signing new IPPs until such time as there was a new agreement between the Department of Energy and themselves regarding this.  The Committee is concerned that this matter has been outstanding for more than a year, and no resolution has been found.  This has placed the IPPs in a precarious situation and the countries IPP programme in jeopardy.  This matter needs to be addressed as a matter of urgency.

Sub-programme – Manufacturing Enterprises

This programme includes Denel, Alexkor and South African Forestry Company (Safcol). It further provides the Minister with operational, operational and capital programme analysis compacting for planning, monitoring and evaluation of SOCs’ performance. All the strategic objectives in this sub-programme were achieved.

Denel

The State-owned company has grown exponentially over the last few years, more than doubling its revenues from R3.9 billion in 2013 to R8.2 billion in 2016. The company is set to grow even further over the next three years. Funding this growth is going to be a challenge that the Department is assisting the SOC to bridge. In May 2017, Fitch Ratings affirmed Denel’s national long-term and short-term ratings are positive. This is a vote of confidence to the turnaround. The Department is working with Denel on a process to reduce the reliance of governance guarantees to access the capital markets.

The Department’s oversight on Denel Aero structures has assisted the company over the years to reduce claims against the 2007 Indemnity Agreement. Over the past 8 years the value of the claims has declined from R222 million per annum in 2007 to R33.1 million in 2015. In 2016/17 Denel Aerostructures, for the first time, put a zero claim against the
R1.6 billion Denel Aerostructures Indemnity Facility which was set up in 2006 in relation to the Airbus A-400M contract. This is evidence of the maturity of Denel Aerostructures as a reliable and supplier of complex systems to global original equipment manufacturers.

a) Committee Observations

On Wednesday, 11 May 2016, the Portfolio Committee on Public Enterprises called Denel to account for the establishment of the subsidiary company, Denel Asia, which according to media reports had been established without Ministerial approval.  The establishment of Denel Asia also coincided with the suspensions of three top executives.  Due to the limited time available to the Committee, the Committee decided to continue the discussions at a later date, which would include the National Treasury (NT) and the Department of Public Enterprises (DPE).  The subsequent meeting was held on 7 September 2016 as a joint meeting between the Portfolio Committee on Public Enterprises and the Select Committee on Communications and Public Enterprises.  However, representatives from the National Treasury was not present at the meeting, therefore the meeting was only attended by the Department and Denel.  The Committee therefore was not able to get the proper clarity that it required regarding the establishment of Denel Asia.  Further to this, Denel’s Board Chairman, Mr Dan Mantsha, was also accused of using his position as Chairman to suspend three executives, the CEO, the CFO and the Company Secretary in order for the Denel Asia deal to be approved. 

Subsequently the Committee decided to include these matters in their inquiry into the governance of SOCs, Denel forming part of phase 3 of the inquiry. During 2017, it was reported that Denel had deregistered Denel Asia as a company. 

Alexkor

During the 2016/7 financial year, the Department competed the desktop study on the Richtersveld Diamond Deposit. Further extensive studies are envisaged on diamond resources to improve levels of confidence and to determine the mineral wealth within the Richtersveld mining concessions. Alexkor continued to experience operational challenges during the 2016/17 financial year. The carat production target was not achieved for the year under review. The deep-sea mining commenced in April 2017. Despite the challenges experienced during commission stages, the deep-sea operations produced 112 047 against the budget of 120 000. The diamond operations revenue increased from
R386.5 in the year 2015/16 to R758 million for the financial year.

Alexkor has identified the following risks which may impact on its future sustainability:

• Insufficient operational cash which could impact on Alexkor’s ability to fulfil its short- and long-term obligations, e.g. operations, Deed of Settlement (“DoS”) and strategies.
• Compliance with the Deed of Settlement is a risk because the settlement is outside the control of Alexkor and lies with third parties, and failure to work together may have repercussions.
• Absence of technical and operational information (e.g. geological model information, life of mine information) and the limitations which this causes in terms of informed decision-making.

a) Committee Observations

The Committee is concerned with the future sustainability of the entity, as diamond production is predicted to fall during the next financial year.  Additionally, according to the Deed of Settlement, Alexkor needs to have an exit strategy as their
51% shareholding of the company needs to be transferred to the community in a socially responsible manner.  The issues surrounding the payment of R45 million to the community also needs to be resolved.

Safcol

Safcol remains financially stable and is able to sustain itself without government support. The Board has developed a growth strategy which has been assessed by the Department and approved by the Minister. The Board further developed a structure for implementation and has commenced with the sourcing of talent to populate the structure.

Safcol’s annual report states that a key governance concern and a major focus area for the Board over the short- term is the qualified audit of Safcol’s financial statements received for the period under review. The qualification primarily relates to irregular expenditure identified by the Auditor-General. Safcol targets zero fatalities, but unfortunately three fatalities were reported during the past year. Two of the fatalities were directly linked to the manual chainsaw harvesting activities. The management structure still has a number of acting positions in key roles. Approximately 61% of land in operation is subject to land claims from communities. This presents a material risk to the longevity and sustainability of the SOC’s operations.

a) Committee Observations

The Committee is concerned about the future sustainability of the entity, and the high turnover of executives at the entity.  The Department needs to ensure that key posts are filled and that the strategy with regards to IFLOMA is addressed.  Safcol is key is providing rural development and local economic development.  The Department must ensure that Safcol contributes to these government priorities.

b) Strategy to overcome areas of under performance

Since 2012/13, the Department has been having monthly meetings with the SOCs’ executives to ensure the implementation of agreed plans. These have enabled quicker interactions with principles where required. The business should, for the first time in 2016/17 breach R1billion turnover. It is also expected to report an operational profit, which will establish a solid base for sustainability.

Sub-programme – Transport Enterprises includes South African Airways (SAA), South African Express (SAX) and Transnet. The purpose is to align corporate strategies of Transnet and SAX with Government’s strategic intent and benchmark their financial and operational performance. All the strategic objectives in this sub-programme were achieved.

South African Express

The Department, in partnership with NT, was instrumental in undertaking a process of developing an optimal corporate structure. This involved the alignment of the operations and ownership of State Owned airline, namely SAA, SAX and Mango. The project is an achievement milestone as it is aimed at addressing the structural challenges that are impacting on the performance of the State Owned airlines. Consultations will engage various stakeholders in the 2017/18 financial year to finalise the optimal corporate structure.

In its annual report SAX states that, “the statement of financial position remained weak as the company ended the year with a cash and cash equivalents of R57, 1 million when compared with a positive balance R23,9 million in 2015, due to the ongoing settlement of outstanding creditors”. The accounting treatment for maintenance reserves is consistent with last year, and the company has obtained an updated independent technical opinion on the methodology used. This has been a point of disagreement with the auditors, and led to a qualification of the results in 2015. Management is accounting for the treatment in line with the requirements of the International Accounting Standards, and stresses that the technical opinion received confirms this position. The auditors have accepted the new opinion obtained but a dispute still exists on the accuracy and classification of the capitalised maintenance reserves.

The weaker ZAR/USD exchange rate impacted negatively on USD based costs, including network cost and SAP transaction costs. Outstanding trade creditors have decreased by R61.2 million, but there is substantial pressure on the company to address this issue with key suppliers. The balance sheet indicates that the company is in need of urgent recapitalisation, by way of permanent equity funding, as the balance sheet cannot bear more debt in order to purchase aircraft. Short or long term debt funding will further hamper the profitability of the company. The company has been granted an extension of the working capital and equity covenants guarantees, as well as additional working capital guarantees to ensure the airline meets the requirements of a going concern, as well as addressing its immediate cash flow needs.

The airline was grounded for 40 hours on 1 May 2016, due to documentation issues relating to reportable incidents. This had a profound effect on the airline, as the market perception was adversely affected. In addition, the spares removal and replacement procedures were redesigned which led to delays in returning aircraft to service. This, together with major scheduled maintenance has severely hampered operations and profitability in the 2017 year. The airline has also parted ways with the CEO, effective March 2017 after 13 years of service in the company.

a) Committee Observations

As stated above, the entity has not tabled its annual report and financial statements timeously to Parliament since the 2012/13 financial year.  This was due to doubt cast on the entity‘s going concern status.  According to the airlines new CEO the airline needs to be recapitalised in order for it to be sustainable going forward.  The Whole of State aviation strategy needs to be finalised in order to merger SAA, SAX and Mango airlines. The Committee is very concerned about the sustainability of the airline in the absence of further guarantees. In the face of these challenges, SAX will need to radically transform the business or wallow in continued crisis.

Transnet

South Africa’s freight rail, ports and pipelines utility grew revenues by 1.7% to
R62.2 billion during 2015/16. Capital investment amounted to R34.3 billion, including R8.8 billion for locomotives, R2.3 billion for wagons, R2.3 billion to sustain rail infrastructure and R1.3 billion for a new multi-product pipeline. Transnet reported freight rail volume of 214.2 million tons, down from 226.6 million tons in the prior year.  The entity continues to pursue its Road-to-Rail strategy, to move tonnage from the road to rail.  Its capital investment programme focuses on upgrading and modernising ports, rail and pipeline infrastructure. In the five years ended 2015/16, Transnet had spent R122.4 billion on capital expenditure. Transnet has adjusted to the weak economic environment by rescheduling part of its capital spending plans. Over the next seven years, it plans capital investments of R273 billion, to be funded by earnings and borrowings against its balance sheet. Foreign borrowing will decline. Transnet continued to mitigate the impact of slow economic growth through stringent cost-containment measures and working-capital management, containing operating costs at R37,9 billion (2016: R35,9 billion), a 5,6% increase. This resulted in a R2,4 billion saving in planned costs. As a result, earnings before interest, taxation, depreciation and amortisation (EBITDA) – Transnet’s key measure of profitability – increased by 5,0% to R27,6 billion (2016: R26,3 billion). The EBITDA margin decreased by 0,2% to 42,1% (2016: 42,2%).

Transnet maintained financial stability and agility by optimising capital expenditure based on validated demand, with our capital investment for the year amounting to R21,4 billion (excluding capitalised borrowing costs), representing a 27,5% decrease from the prior year (2015: R29,6 billion). The capital investment for the year represents R5,2 billion invested in the expansion of infrastructure and equipment, while R16,2 billion was invested in maintaining capacity in the rail and ports divisions.

Government and state-owned companies plan to spend R327.7 billion on transport and logistics over the medium term. This accounts for 34% of total public-sector infrastructure expenditure during this period. These investments will improve the national transport infrastructure network, enhance the mobility of people and services, reduce transport costs and facilitate regional trade. Revenues from services provided by state-owned companies will help fund infrastructure investment, complemented by national and provincial allocations for road construction and maintenance for the non-toll network. Transnet’s capital expenditure is expected to total R118.4 billion over the next three years.

Table 6: Transnet capital expenditure and estimates

Source: Transnet

In its integrated report, Transnet notes that international rating agency, Standard & Poor’s, has lowered the Company’s foreign currency rating to BB+ from BBB- and the local currency to BBB- from BBB, both with a negative outlook. On 13 June 2017, Moody’s also lowered the Company’s rating to Baa3 with a negative outlook. Both these actions were due to the rating action on the Sovereign as Transnet is viewed to be closely linked to the Government. The company has evaluated the potential impact on the Company’s financial position, liquidity and solvency and do not expect significant negative effect on estimates. S&P has further indicated that Transnet’s liquidity was still adequate and has acknowledged the sound relationship it has with South African banks. The agency also recognised the Company’s good standing in capital markets, its sufficient risk and management framework, and its unused credit facilities.

a) Committee Observations

Transnet is another SOC that has experienced challenges caused by procurement irregularities in the following contracts:

• The tender to purchase 1 064 locomotives at a value of R50 billion.  It is alleged that Tequesta (Pty) Ltd received R5.3 billion as an advisory fee on this contract from China South Rail (CSR), which is one of the companies that won the tender.
• Contracts worth over R300 million to Regiments/Trillian for advisory services.
• Contracts with Neotel, in which Neotel paid a company called Homix approximately
  R91 million for assisting them in getting specific contracts with Transnet.
• Contracts worth R570 million for cranes delivered in 2012 by Shanghai Zhenhua Heavy Industries (ZPMC), where it is alleged that crane prices were inflated to include “commissions and fees”, which was paid to JJ Trading (JJT).  This payment was to ensure that ZPMC won the tender from Transnet.
• Allegations against Transnet suppliers such as SAP, Software AG, McKinsey, CSR, Liebherr-Africa paying commissions to third parties after securing contracts with Transnet.
• Allegations that R232 million was misappropriated by Regiments Capital (Pty) Ltd from Transnet Second Defined Benefit Fund.

The Committee resolved to investigate these allegations against Transnet in the second phase of its inquiry into governance at SOCs.  These will also address undue influence and possible conflicts of interest that might have occurred as a result of Board and Executive complacency.

Sub-programme – Economic Impact and Policy Alignment

The purpose of this sub-programme is to align shareholder oversight of SOCs in relation to overarching government economic, social and environmental policies and implement strategic interventions to contribute towards achievement of national objectives in support of economic growth and transformation. The sub-programme achieved all strategic objectives set with the exception of development of black industrialists and enterprise development programme.

The comprehensive high-level socio-economic impact assessment for selected projects for Safcol and Eskom was completed. In addition to a Departmental Research Policy, papers focusing on macro and industry specific research were developed, approved as well as presented to EXCO. Fifteen Memoranda of Understanding were signed with various South African universities to assist the Department to complete the work it does not have the capacity to complete internally. Regarding the macro-economic impact model, the framework for this model was developed, advertised and presented to EXCO. Terms of reference (for the impact model) were developed, advertised, bids were received, evaluated and are currently with the bid adjudication committee. The Air Quality and Compliance Forum meeting has helped expedite the processing of Water Use licences for SOCs.

a) Strategy to overcome areas of under performance

Service Level Agreements for the Black Industrialist Project will be fast-tracked in the 2017/18 financial financial year. Tertiary institutions will be used to development the concept for the project.

Sub-programme – Strategic Partnerships

The purpose of the sub-programme is to drive relationships between SOCs, key customers and supplier sector to transform sectoral and social composition of the economy. The sub-programme reported achievement on fast tracking delivery of build programme while it didn’t achieve on the strategic goal on ensuring SOC financial sustainability.

In the previous year the Department reported that, the review of the financial position of SOCs was undertaken and the identification of gaps for financial sustainability as well as potential options for the delivering on capital programmes. This was done through an analysis of the future of the newly established BRICS bank. The analysis was based on what the bank would bring in improving the financial positions of the SOCs within the DPE portfolio, particularly for Eskom and Transnet. The Department has also participated in the finalisation of the Private Sector Participation Framework which was led by National Treasury as the lead on the Private Sector Participation Framework. The planned target for 2016/17 on the development of capital structure optimisation strategy for the Department’s portfolio was not achieved. The reasons stated for non-achievement is that further consultation is still required on the capital structure optimisation strategy. The Department has put in place periodic sessions on investment funding as platform to achieve the desired goal.

a) Committee Observations

The Committee has serious concerns regarding the exposure of the entities within the Department’s mandate to government guarantees.  Given the high exposure to government guarantees coupled with governance issues, specifically the high level of procurement irregularities at these entities, exposes the government fiscus to risk and a further downgrade of the sovereign investment grade.  This will make it more difficult for government entities to borrow from the open market, and at higher interest rates, putting more pressure on the fiscus. All this will have knock-on effects on the economy at large, and make it even harder for the poor and poverty stricken to survive.  Thus the Committee takes its decision for the inquiry into the governance very seriously as it is aware of the damaging effect these allegations has on the sovereign and the people of South Africa.  The Committee is aware that the management and/or mismanagement of SOCs has huge implications on the fiscus of South Africa.  In this vein, the Committee urges the Department to work closely with the National Treasury to find a solution to entities requiring government guarantees in order to sustain their viability.

5.3       Concluding Comments on Service Delivery Performance

The Department indicated that it has completed its organisational re-alignment exercise to strengthen and enhance the existing structure. The re-alignment process sought to drive operational efficiencies so as to improve the Department’s ability to support its oversight functions of the SOCs. The Department’s initiatives to reform governance of the SOCs informed the review of the organisational architecture to determine the extent to which the Department is structurally configured to deliver on its mandate. The development of the business case of the organisational architecture and the post establishment structure was finalised. The overall vacancy rate at the end of the financial year 2016/17 remains high at 14%. The Department has 223 posts approved on the establishment, while number of positions filled is 191. At the senior management (level 13-16), a total of 27 posts remain unfilled by the Department. The Department has three acting Deputy Directors-General (DDGs) responsible for key sub-programmes namely: Corporate Management, Energy Enterprises, and Transport Enterprises. These positions require critical skills and should be filled with urgency in order for the Department execute its mandate and perform optimally.

The Department further developed Enterprise Risk Management (ERM) architecture aimed at ensuring that the Department maintains sound risk management practices that support the implementation of the overall organisational strategy that is aligned to the NDP. The ERM architecture provides a synopsis of the inputs, policies, processes and structures that inform the overall risk management activities of the Department.

The Department has identified strategic risks associated with the annual performance targets as follows:

• Delays in procurement processes
• Critical skills and capacity management
• Stakeholder cooperation and support
• Delays in verification of assets belonging to the State
• Inadequate policy alignment
• Misalignment of the DPE and DOT strategy review processes
• Assessment of the geopolitical risks.

The Department needs to improve by setting strategic objective in relation to all sub-programme. SOC oversight remains a high priority for the Department. This demands that mitigating strategies for addressing governance, operational effectiveness and financial viability be developed speedily. The role of Director-General and Chief Financial Officer (CFO) should be executed beyond coordinating the Department’s internal control environment. The Director-General and CFO have a transversal role in their nature of coordinating SOCs compliance with key legislative mandates and financial statutes.

6. Service delivery and Financial performance assessment

In the previous year, the Department of Public Enterprises spent 99.8% of its budget, and received an unqualified audit opinion with findings. This year the Department spent 94.7% (R253.8 million) of its total budget.  The under expenditure of 5.3% (R14.2 million) primarily relates to compensation of employees resulting in vacant posts. Virements of R1.2 million were made between three programmes during the adjustment budget in September 2016. This was due to the function shift which resulted in movement of posts within the Department. There was not roll-over submitted to the National Treasury (NT).

The Department has no unauthorised expenditure. Fruitless and wasteful expenditure of R14 886.50 was incurred during the 2016/17 financial year and consists of matters related to travel and accommodation expenditure such as non-arrival charges (no shows) and cancellation fees.

The department should monitor the SOCs financial aspects and its impact on their viability. The National Treasury in its 2017 Budget Review notes that over the medium term,  the level of exposure (the amount that the state-owned companies have borrowed against their guarantee) is expected to rise by R52.5 billion. The main changes to guarantees were:

• Eskom is expected to use R43.6 billion of its guarantee in 2016/17 and R22 billion annually over the medium term.
• SAA has used R3.5 billion of a R4.7 billion going-concern guarantee, with the remainder likely to be used in 2017/18.
• The South African National Roads Agency Limited used R2.9 billion of its guarantee in 2016/17, increasing exposure to R30.1 billion. The full guarantee is expected to be used by 2018/19.
• The South African Post Office increased its exposure by R2.6 billion in 2016/17, utilising nearly all of its R4.4 billion guarantee.

Guarantees to some state-owned companies remain a major risk to the fiscus. The Department needs to develop mitigating strategies to restrain SOCs’ over exposure reliance on guarantees.

Table 7: State Owned Companies Guarantee Exposure                                        

Source: National Treasury 2017

The ratings agency, Standards and Poor, expects guarantee utilizations to reach R500 billion in 2020, or 10% of 2017 GDP. The utilizations are dominated mainly by Eskom (BB-/Negative-), which benefits from a government guarantee framework of R350 billion, about 7% of 2017 GDP. The ratings agency estimates that Eskom will have used up to R300 billion by 2020. South Africa’s energy regulator has capped Eskom’s permitted 2017/2018 tariff increase at 2.2% – with negative implications for its financial performance. Eskom will fund the resulting revenue gap via borrowings of up to R70 billion, of which up to half may utilize government guarantees. Eskom still has to complete its board appointments and appoint a permanent CEO. Broader reforms to state-owned enterprises are still being discussed and the ratings agency does not foresee implementation in the near term.

According to the World Bank Treasury, sovereign credit guarantees to state related entities can help catalyze private sector investments and fulfill desirable policy objectives. On-lending can channel resources from government borrowing to specific entities and desired projects. Guarantees, however, also create contingent liabilities and the on-lending of proceeds from government borrowing creates contingent assets, i.e. the government assumes the risk of the beneficiary’s inability or unwillingness to repay.

Prudent risk management can help mitigate these fiscal risks. Managing fiscal risks should be embedded in a holistic risk management framework, including various aspects such as the definition of objectives for risk management, risk analysis, the development of a risk management strategy, as well as implementation and monitoring of the strategy. Guarantees and on-lending by government can help meet policy and development objectives but also create fiscal risks. To manage these risks, government should design holistic risk management frameworks that include the analysis and measurement of risks. To set up a risk measurement process, risk managers should first clarify the specific situation of their respective exposure, and then conduct a thorough risk analysis which can be translated into quantified measures. The results of risk analysis and measurement can be used to inform various risk management tools designed to mitigate governments’ fiscal risks.

7. KEY FINDINGS

7.1       Technical Issues

In the Department’s annual report, the Director-General states the following:

• All information and amounts disclosed throughout the annual report are consistent.
• The annual report has been prepared in accordance with Guidelines on Annual Report by National Treasury.
• The Annual Financial Statements (AFS) have been prepared in accordance with modified strands and relevant frameworks and guidelines issued by the National Treasury.
• There are systems of internal control established and implemented to provide reasonable assurance to the integrity and reliability of the performance information, human resources and AFS.

7.2       Governance and Operational Issues

Currently most SOCs have vacancies in key executive management positions in place. There are acting Group Chief Executives in SOCs such as, Alexkor, Denel, Eskom, and Safcol. Eskom had problems at the board level. Currently Eskom has an Interim Chairperson. These positions should be filled so that there is stability in the SOCs. Governance remains a key concern in most SOCs. A telling example is the failure of South African Express in meeting reporting deadlines. 

The Department should develop and issue an ownership policy framework that defines the overall objectives of state ownership. The Department should set up reporting systems allowing regular monitoring and assessment of SOC performance.

The Committee is looking into governance, procurement and financial viability of Denel, Eskom and Transnet as part of its oversight mechanism. This should have been avoided if the Department had strategies, systems and process in place to discharge its mandate. Within the Department there were weaknesses in detecting corporate governance challenges faced by these SOCs.

The Committee is concerned that the Department has not shown sufficient leadership and that it does not have appropriate checks and balances in place to monitor the SOCs sufficiently.  The Committee also raised that concern that the Department and the Minister as the only shareholder in these SOCs do not have enough power over the SOCs to maintain proper governance.  The Committee therefore finds it imperative for the Shareholder Management Bill to be fast-tracked and presented to Parliament by the end of March 2018.  This will allow the Committee to address the strengthening of the Department’s and Ministry’s oversight and monitoring function.

As stated above, the allegations against Eskom, Denel and Transnet will be investigated by the Committee during the inquiry into governance of these SOCs.  The Committee will address these issues as it is aware of the negative impact these allegations has on the fiscus of the country, economy and population at large.

8. Summary of reporting requests

The Auditor-General reported that the Department’s achieved a clean audit with no findings. Therefore, there are no reporting requests relating to the Department.

9. Recommendations

1. The Committee recommends that the Minister of Public Enterprises should:

1. Ensure the capacitation of the internal audit function in the Department and state-owned companies to ensure improvements in basic record keeping, strengthening internal controls and compliance with the legislative framework.
2. Together with the Department of Planning, Monitoring and Evaluation, develop mechanisms for appropriate sanctions to discourage poor performance, especially in ensuring that the attainment of targets in the annual performance plans are aligned to budget planning and spending performance.  The Department should also ensure that there are punitive measures in place for under-performance against targets for board members, executives, contractors of SOCs and officials of the department.
3. Ensure that all critical, funded and vacant posts are filled timeously.
4. Immediately strengthen and improve the oversight effectiveness over public entities with emphasis on the following:

• Appropriate and effective planning and budgeting processes are put in place;
• The financial management and control structures and processes are such that accurate, timeous and reliable recording and reporting of all financial transactions takes place; 
• That the appropriate financial management systems and controls are in place to ensure the effective management of the financial affairs of the entity; 
• That the financial affairs and performance of the entities as reported is acceptable in terms of the corporate plans and shareholder compacts;
• Significantly enhance reporting and accountability arrangements that facilitate an appropriate oversight by the Department; and
• Urgently develop technical capacity within the Department to oversee its public entities.
  1.             Ensure that all State Owned Entities develop and set explicit targets and submit quarterly reports to the Committee on:

• their cost containment programme, working capital management, infrastructure investment programme, procurement management strategy and effectiveness; and
• programmes for supporting SMMEs inclusive of clear targets and rand values and their business efficiency programme. 
  1. Address concerns raised by the ratings agencies on Eskom’s future funding gaps and utilization of government guarantees.
  2. Assist with the timeous resolution of land claims in conjunction with the Department of Rural Development and Land Reform, and ensure a sustainable future role for Safcol.
  3. Create black industrialists and local industries through SOCs.
  4. Increase and strengthen oversight over state-owned companies through robust and regular interaction with CEOs, Board Members, Audit Committees, regular visits to the construction sites of major infrastructure projects as well as to offices and sites of the entities.
  5. Fast-track the introduction of the Shareholder Management Bill which will empower the department to carry out its oversight responsibilities over SOCs more effectively, especially in providing guidance on how to align SOCs’ strategic priorities with government policies.  The Department should present the draft Bill to the Committee by the end of March 2018.
  6. Provide the Committee with shareholder compacts signed with SOCs in order to enhance the oversight role of the Committee, within one month after the signing of the agreement.
  7. Institutionalise the recommendations of the Presidential Review Committee on SOCs and implement the Inter-Ministerial Committee, headed by the Deputy President, looking into the SOCs and the Department.
  8. Ensure that all the SOCs undertake interim audits, as most of them received qualified audit opinions with findings.
  9. Ensure that the Department closely monitors South African Express Airways in the implementation of the turnaround strategy.
  10. Ensure that the Department finalises the future strategic roles for Alexkor and Safcol timeously.
  11. Pursue the finalisation of the Whole of State policy to bring alignment and synergy among state aviation assets, i.e. SAA, SAX and Mango, together with the National Treasury.
  12. Address issues relating to SOCs with going concern issues.
  13. Provide the Committee with quarterly progress reports regarding the implementation of these recommendations.
  14. Ensure that the Department submits a report to the Committee on its failure to fill vacancies, especially at management level, and what is being done to address this.  This report needs to be submitted within three months after the adoption of this report by the National Assembly.
  15. Ensure that the Department submits a report to the Committee on governance gaps with the SOCs, including governance structures, within three months after the adoption of this report by the National Assembly.
  16. Ensure that the Department submits a report to the Committee on compliance by the SOCs with the procurement localisation strategy adopted by government of 75% local procurement.  This report should be submitted to the Committee within three months after the adoption of this report by the National Assembly.
  17. Ensure that Transnet submits, through the Department, a report of how the R8 billion expenditure programme in the Port of Saldanha Bay will be spent, including timelines.  This report should be submitted within three months after the adoption of this report by the National Assembly.
  18. Ensure that the Department submits an assessment on the ownership of SAX aircraft and how this will affect possible aircraft leases should the Whole of State aviation strategy be approved. 
  19. Ensure that the Department provides a written response to the Committee on the above recommendations and the progress thereon within three months after the adoption of this report by the National Assembly.

1. The Committee recommends that the Minister of Finance should:

9.2.1    Ensure that the nuclear procurement plan to be undertaken by Eskom should not be pursued at the expense of the financial viability and sustainability of Eskom and of the country.

9.2.2    Ensure that a strategy to reduce SOCs’ reliance on government guarantees is adopted.

9.2.3    Ensure mechanisms for oversight by over SOCs’ regulatory agencies.

9.2.4    Together with the department of Public Enterprises, finalise the aviation Whole of State policy and ensure implementation thereof as soon as possible.

9.2.5    Together with the Department of Public Enterprises, address the concerns regarding going concern issues pertaining to SOCs.

9.2.6    Provide a written response to the Committee on the above recommendations and the progress thereon within three months after the adoption of this report by the National Assembly.

1.   Recommendations that were not implemented from the previous financial years

9.3.1    Provide the Committee with shareholder compacts signed with state-owned   companies in order to enhance the oversight role of the Committee, within one month after the signing of the agreement.

9.3.2    Provide the Committee with shareholder compacts signed with state-owned companies in order to enhance the oversight role of the Committee, within one month after the signing of the agreement.

9.3.3    Institutionalise the recommendations of the Presidential Review Committee on SOCs and implement the Inter-Ministerial Committee, headed by the Deputy President, looking into the SOC’s and the Department.

9.3.4   Fast-track the introduction of the Shareholder Management Bill which will empower the department to carry out its oversight responsibilities over State-Owned Companies more effectively, especially in providing guidance on how to align SOCs’ strategic priorities with government policies. 

The Minister of Public Enterprises should furnish the Committee with a progress report on

the implementation of these recommendations by 31 March 2018. The Committee views the timeous responses to Committee recommendations as important for ensuring accountability and transparency. More importantly, it allows for oversight to work together with the Executive in finding solutions to the challenges facing our country.  

10.      

The Committee would like to express its gratitude to the management of the Department of Public Enterprises, the Office of the Auditor-General, State-Owned Companies reporting to the Department of Public Enterprises and the parliamentary officials supporting the Committee for their hard work and co-operation during this process.

Report to be considered.

[1] Department of Public Enterprises (2017)

[2] Ibid

[3] Department of Public Enterprises (2017)

[4] Auditor-General of South Africa (2017)

[5] Department of Public Enterprises (2017)

[6] Auditor-General of South Africa (2017)

[7] Department of Public Enterprises (2017)

[8] Auditor-General of South Africa (2017)

[9] Eskom (2017)

[10] Transnet (2017)

[11] Ibid

[12] Ibid

[13] SA Express (2017)

[14] Ibid.

[15] National Treasury (2017b)

[16] National Treasury (2017b)

[17] National Treasury (2017b)

4.  Budgetary Review and Recommendation Report of the Portfolio Committee on Public Enterprises, dated 15 November 2017

The Portfolio Committee on Public Enterprises (hereinafter referred to as the Committee), having considered the performance of the Department of Public Enterprises for the 2016/17 financial year, reports as follows:

1. Introduction

1. Purpose of the BRRR

In terms of Section 5 of the Money Bills Amendment Procedure and Related Matters Act, No. 9 of 2009, the National Assembly, through its Committees, must annually compile the Budgetary Review and Recommendation Reports (BRRRs) that assess the service delivery performance of departments given available resources. Committees are also expected to provide an assessment of the effectiveness and efficiency of the Department’s use of available resources, and may include recommendations on the forward use of resources.

1.2       The Role and Mandate of Committee

The mandate of the Committee is to consider legislation referred to it; exercise oversight over the Department and the six state-owned companies (SOCs) that report to it; consider international agreements referred to it; consider the budget vote of the Department of Public Enterprises and its entities; facilitate public participation in its processes; and to consider all other matters referred to it in terms of legislation and the rules of the National Assembly.

1.3       Description of core functions of the Department

The Department of Public Enterprises is the shareholder representative for government at the state-owned companies in its portfolio. The Department’s mandate is to fulfil oversight responsibilities at these state-owned companies to ensure that they contribute to the realisation of government’s strategic objectives, as articulated in the National Development Plan (NDP), the medium-term strategic framework (MTSF), the new growth path and the industrial policy action plan. State-owned companies are crucial to driving the state’s strategic objectives of creating jobs, and enhancing equity and transformation. The department does not directly execute programmes but seeks to use state ownership in the economy to support the achievement these objectives. It is within this context that the BRR report concerning the Department of Public Enterprises by the Portfolio Committee on Public Enterprises is presented. 

1.4       Method

This report is a culmination the Committee’s engagement and interactions with the Department and the State-Owned Companies that report to it. This entailed a very intense and thorough analysis of the strategy and operations of the Department and its entities through briefings, oversight visits and interaction with relevant stakeholders.

These included a briefing from the Department of Public Enterprises on its annual report on 5 September 2017, a briefing from the Office of the Auditor-General of South Africa (AGSA) on the audit outcomes of the Department and its entities on 4 October 2017, and deliberations on the analysis done by the parliamentary support staff on the financial and non-financial performance of the Department and its entities. The report incorporates inputs from the Internal Audit unit of the Department of Public Enterprises.

1.5       Outline of the contents of the Report

The Budget Review and Recommendation Report (BRRR) of the Committee contains the following:

• Overview of the key relevant policy focus areas.
• Summary of previous key financial performance recommendations of the Committee.
• Overview and assessment of financial performance.
• Overview and assessment of service delivery performance.
• Financial and service delivery performance assessment.
• Committee observations and responses.
• Committee recommendations.

1. Overview of the key relevant policy focus areas

In 2012, the year in which the NDP was published, the decade-long upswing in commodity prices had begun to reverse, signalling deeper shifts in the global economy. The pace of Chinese industrialisation began to flag. World trade began to slow. A debt crisis broke out in Europe. Geopolitical tensions began to rise. Longer-term trends in developed countries – ageing populations, slowing productivity and widening inequality – became more pronounced. Imbalances in globalisation, stagnant incomes for the majority and a rising distrust of elites took centre stage in the global discourse.

Over the past year, these developments culminated in a series of political shifts in the US and Europe. These find expression in vociferous economic nationalism, rising disdain for multilateral institutions and increasing demands to tighten national borders. The policy direction of the new US administration, the outcome of the UK’s vote to leave the European Union, and elections in France and Germany contributed to global uncertainty, given that these developments directly involve four of the world’s largest economies.

South Africa’s development rests on a fair, rules-based global trading and financial system. The implications of recent international developments for South Africa’s economic trajectory need to be carefully considered. Over the medium term, pressure on the world economy is expected to increase. The resulting uncertainty is the single biggest risk to global economic recovery, with potentially severe consequences for South Africa.

The World Bank’s ninth edition of the South Africa economic update titled Private Investment for Jobs, analyzes the effectiveness and efficiency of investment tax incentives (ITIs) in various economic sectors. ITIs are one of several policy tools that the government has used to accelerate industrial development in the past decade to promote additional investment and job creation against the shortcomings of a commodity-driven growth model. The report suggests that sectors which would benefit from reoriented incentives also enjoy the largest employment multipliers, and would thus amplify the impact of incentives on job creation.

Job creation is one of South Africa’s fundamental goals, with the country’s National Development Plan (NDP) targeting the creation of 11 million jobs to reduce the high unemployment rate to 6% by 2030, and to significantly reduce poverty and inequality. To meet this target, it is estimated that the economy would have to produce at least 600,000 new jobs on average, annually. However, the report reveals that the pace of job creation in the past decade has been too slow with about 310,000 jobs having been created on average every year; 265,000 by the private sector, and about 50,000 by the public sector between 2005-2015. The unemployment rate in South Africa was 27.7% as at the third quarter of 2017 and remains at record high levels last seen in 2003.

The Budget Review 2017 indicated that over the medium term, economic growth is projected to improve moderately on the strength of several developments:

• The real exchange rate has depreciated, boosting competitiveness.
• An uptick in commodity prices is expected to carry through into 2017.
• The severe drought has eased in several farming regions.
• Electricity supply has stabilised.
• Improved labour relations are expected to boost job creation.

Government, working with business, labour and civil society, can act decisively to boost investment in the short term by:

• Finalising the Mineral Resources and Petroleum Development Amendment Bill, and legislation on land holdings and security of tenure. Certainty will promote investment in mining and agriculture.
• Concluding the transition from analogue to digital television signals, and allocating new spectrum to broadband services. Cheap and reliable internet will lower costs and create business opportunities for new entrants. It can also provide a platform to expand health and education services in remote areas.
• Expanding the independent power producer programme in renewables and gas. An expansion that provides certainty to investors can open up substantial opportunities for black-owned firms, create thousands of jobs and boost power supply.
• Ensuring that the state performs its economic regulatory functions effectively. For example, speeding up the verification of black empowerment credentials and local content requirements would support transformation and local manufacturing.
• Reinforcing South Africa’s commitments to global standards in financial sector regulation. South Africa needs to maintain its position as an investment destination, supported by a sophisticated business and financial sector, and adherence to international standards.
• Safeguarding the country’s investment-grade credit rating.
• Maintaining a sustainable, realistic fiscal framework that promotes transformation, a stable labour relations environment and reliable electricity supply will go a long way to reduce risk perceptions.
• Addressing shortcomings in state infrastructure planning and execution.
• Establish a new financing facility for large infrastructure projects.

South Africa’s projected GDP growth for 2017, forecast at 1.3% at the time of the 2017 Budget, has been revised down to 0.7%. GDP growth is expected to increase slowly, reaching 1.9% in 2020. Relative to the 2017 Budget projections, debt-service costs will be R1 billion higher in 2017/18, R2.4 billion higher in 2018/19 and R6 billion higher in 2019/20. By 2020/21, government projects that nearly 15% of main budget revenue will go toward servicing debt. This crowds out the space to fund social and economic priorities.

2.1 Inclusive Growth

Since 1994, South Africa has been guided by the Constitution’s call to heal the divisions of the past and establish a society based on democratic values, social justice and fundamental human rights. The country has made much progress in these areas. But too little has changed in the structure of the economy and patterns of wealth accumulation. Inclusive growth requires broad-based transformation to break down structural impediments to new economic activities, deconcentrate industries dominated by few participants, accelerate the inclusion of millions of black South Africans into jobs and businesses, and return to a path of rising per capita incomes for all. The changes needed to achieve this are set out in the NDP. These include:

• Improving education and skills development, starting with a more effective basic education and early childhood development sector.
• Strengthening competition laws to address skewed ownership and control, which is a barrier to business entry and the expansion of key markets that are essential for job creation.
• Increasing private-sector participation in sectors dominated by public enterprises, and ensuring that effective regulatory authorities curb the power of monopolies.
• Providing support and incentives for labour-intensive sectors, including agriculture, agro-processing and tourism.
• Overcoming the spatial fragmentation of South Africa’s cities, so that people have easier access to jobs and infrastructure.

The World Economic Forum identified seven pillars for the inclusive growth and development framework:

• Pillar 1: Education and Skills – Access, Quality and Equity
• Pillar 2: Basic Services and Infrastructure – Basic and Digital Infrastructure and Health Related Services and Infrastructure
• Pillar 3: Corruption and Rents – Business and Political Ethics and Concentration of Rents
• Pillar 4: Financial Intermediation of Real Economic and Investments – Financial System Inclusion and Intermediation of Business Environment
• Pillar 5: Asset Building and Entrepreneurship – Small Business Ownership and Home and Financial Asset Ownership
• Pillar 6: Employment and Labour Compensation – Productive Employment and Wage and Non-Wage Ownership
• Pillar 7: Fiscal Transfers – Tax Code and Social Protection.

SOCs are central in contributing to this framework. The Department must develop a policy mechanism to institutionalise the framework in order to improve performance in SOCs with the objective of achieving economic growth and social inclusion.  

2.2 Economic transformation through preferential procurement

Revised preferential procurement policy regulations took effect on 1 April 2017. The following changes aim to enhance transformation:

• Tenders can be targeted to empower specific groups, such as black women.
• Bids up to R50 million will be evaluated in terms of the 80/20 preference point system (the previous threshold was R1 million), which will help smaller, black-owned firms to compete.
• Public entities will be allowed to negotiate prices and value for money with preferred service providers.
• Procurement of locally manufactured goods will be supported.
• Preference points will be allocated in line with broad-based black economic empowerment status.
• Compulsory subcontracting of at least 30% for tenders above R30 million will be implemented, where feasible, to advance designated groups.

These changes in policy and regulations have implications for the Department and the SOCs as they are linked to the transformation targets of government. It is imperative that these changes are integrated in the annual performance plan of the Department and the corporate plans of the SOCs to advance the objectives of government on localisation, small business development and broad-based black economic empowerment.

2.3 Key Policy Focus for the Department of Public Enterprises

The Department of Public Enterprises oversees six state-owned companies: Alexkor, Denel, the South African Forestry Company, Eskom, South African Express Airways and Transnet. These companies are key drivers of economic growth over the short and medium term. The department monitors state-owned companies to ensure that the right investments are made to create jobs and sustain economic growth. In delivering on its mandate, the department contributes to the NDP objectives as expressed in outcome 4 (decent employment through inclusive growth) and outcome 6 (an efficient, competitive and responsive economic infrastructure network) of government’s 2014-2019 medium-term strategic framework. The department’s focus over the medium term is on strengthening its oversight capacity and ensuring that state-owned companies under its authority are contributing to investment in key infrastructure.

This is a reaffirmation on how Government’s infrastructure programme will support the growth of supply sectors, unlock key bottlenecks in the economy and underpin structural transformation. The Strategic Infrastructure Projects (SIPs) identified in the Presidential Infrastructure Coordinating Council (PICC) in which State-Owned Companies are leading will have a catalytic impact on job creation, unlocking resources developing the poorest regions of our country and overcoming spatial inequalities. The SOCs have a regional outlook informed by government’s commitment to the African Union on the key Strategic Infrastructure Projects. The Department provides oversight to these entities to deliver on the developmental objectives of government and to ensure that they are commercially viable. SOCs contribute continental developmental objectives as part of government’s commitment to the AU’s Agenda 2063.

2.4 Key Policy Developments and Legislative Changes

In its 2015/16 annual report, the Department outlined that the Shareholder Management Bill is at its advanced stages and will be presented to Cabinet before being introduced to Parliament. However, the report indicated that there were no policies or legislation that affected the departmental operations during the year under review. The Department did not meet its objective of introducing the Shareholder Management Bill to Parliament as outlined in last year’s annual report.

The Department exercises shareholder oversight over six SOCs. All the SOCs are incorporated as companies in accordance with the provisions of the Companies Act, 2008. All the SOCs with the exception of Denel, are established in terms of their own enabling legislation which sets out the purpose, mandate and objectives for which they are founded.

The Department is the administrator and custodian of all legislation relating to the establishment of SOCs. In terms of section 63(2) of the Public Finance Management Act, No. 1 of 1999, as amended (the PFMA), the Minister of Public Enterprises has, inter alia, the responsibility of ensuring that SOCs comply with the PFMA. In the financial year 2016/17, there were violations of the PFMA by some of the major SOCs which were reported in their audit findings.

3. Summary of PREVIOUS BRRR recommendations of the Committee

Based on the analysis of the department’s budget for the year 2015/16, the following recommendations were made:

3.1       The Committee Recommended that the Minister of Public Enterprises should:

3.1.1    Ensure the capacitation of the internal audit function in the Department and state-owned companies to ensure an improved record keeping and compliance with the legislative framework.

3.1.2    Consider introducing relevant systems as well as considering evidential requirements during the annual strategic planning process in order to ensure that all predetermined targets are achieved and that targets are realistic and achievable.

3.1.3    Increase and strengthen oversight over state-owned companies through robust and regular interaction with CEOs, Board Members, Audit Committees, regular visits to the construction sites of major infrastructure projects as well as to offices and sites of the entities.

3.1.4 Ensure that emphasis is placed on monitoring and evaluation, so that the SOCs’ implementation of Government’s policy objectives is realised, especially their outcomes as this has an impact on peoples’ lives.

3.1.5    Fast-track the introduction of the Shareholder Management Bill which will empower the department to carry out its oversight responsibilities over state-owned companies more effectively, especially in providing guidance on how to align SOCs’ strategic priorities with government policies.

3.1.6    Provide the Committee with shareholder compacts signed with state-owned companies in order to enhance the oversight role of the Committee, within one month after the signing of the agreement.

3.1.7    Institutionalise the recommendations of the Presidential Review Committee on SOCs and work with the Ministerial Committee, headed by the Deputy President looking into the SOC’s and the Department.

3.1.8    Ensure that the guiding frameworks for SOCs are completed timeously and implemented so as to provide a stable working environment. The Department should ensure that the SOCs comply with these frameworks.

3.1.9    Ensure that there are punitive measures in place for under-performance against targets for board members, executives, contractors of SOCs and officials of the department.

3.1.10 Ensure that all the SOCs undertake interim audits, as most of them got unqualified audit opinions with findings.

3.1.11  Ensure that the Department of Public Enterprises closely monitors South African 

           Express Airways in the implementation of the turnaround strategy.

3.1.12  Ensure that the Department of Public Enterprises should introduce mechanisms that would ensure SOCs implement the recommendations of the department.

3.1.13  Ensure that the Department finalises the future strategic roles for Alexkor and

           Safcol.

3.1.14  Ensure that the vacancies in the department are filled, as well as the acting positions in the entities with an outcome of developing the strategic capacity of the Department.

3.1.15  Pursue the finalisation of the Whole of State policy to bring alignment and synergy among state aviation assets, i.e. SAA, SAX and Mango.

3.1.16  Ensure that the Department continues to work closely with policy departments such as the Departments of Transport, the Department of Mineral Resources, the Department of Energy, the Department of Defence and Military Veterans and the Department of Agriculture, Forestry and Fisheries, in order to influence the policy environment in which the SOCs operate.

3.1.17 Ensure that there are time frames to rectify the shortcomings as identified by the findings of the Auditor-General be set and given to the Committee.

3.1.18 Complete the objective on Business Mapping Process.                                                           

3.1.19 Ensure that service providers are paid within timeframes and project management capacity is enhanced in the department.

3.1.20 Ensure that spending on compensation is fast tracked through acquiring critical skills.

3.1.21 Address issues relating to SOCs with going concern issues.

3.2       The Committee recommended that the Minister of Finance:

3.2.1 Should consider clarify issues relating to the Eskom coal contract and provide guidance in terms of actions that should be followed.

1. Should provide clarity regarding Denel Asia and provide the best course of action.

To date, the Committee has not received responses to these recommendations either from the Minister of Public Enterprises or the Minister of Finance.

1. Overview and assessment of financial performance

The Department spent 94.7% of its budget in the 2016/17 financial year, and received an unqualified audit report with no findings. However, the 2017 BRRR of the Department is tabled under serious economic pressures and poor financial governance experienced in critical SOCs under the oversight of the Department. If the financial and governance risks identified in the SOCs remain unchanged, they will significantly contribute to the collapse of the South African economy.

In engaging with the Department’s and SOCs performance reports, the Committee notes the following main risks to the medium-term fiscal and economic outlook as reported in the 2017 Risk Statement published by National Treasury:

Table 1: Summary of Risks to the Economy and Fiscus 

 Adapted from National Treasury, 2017 MTBPS

Several state-owned companies persistently demonstrate operational inefficiencies, poor procurement practices, weak corporate governance and failures to abide by fiduciary obligations. State-owned companies that have been able to roll over maturing debt have done so on an increasingly unsustainable basis, with shorter repayment terms, higher interest rates or reliance on government guarantees. Several lenders have declined to roll over debt falling due and required settlement. The contingent liability risks are rapidly becoming a reality.

Table 2. Overview of Vote allocation and spending (2012/13 to 2016/17) R’million

Source: Department of Public Enterprises (2017)

As shown in Table 2, of the five years shown above, the DPE has underspent by more than 5% for three of these years.  The reason given for the under spending in the 2013/14 and 2014/15 financial years was mainly due to delays in the filling of vacant posts and delays in projects that have not yet commenced and other projects that still needed to be completed.  The under expenditure of R14.2 million in the current year similarly is also due to vacancies which are as a result of the re-alignment of the organisational structure.[1] The R23.3 billion adjusted budget in 2015/16 was due to the R23 billion Special Appropriation for the recapitalisation of Eskom during that financial year.  During the 2012/13 financial year, the Department received R350 million for Alexkor to settle outstanding unfunded obligations under the Alexkor/Richtersveld community deed of settlement, including the tax obligation of R69.9 million, while R700 million was allocated to Denel for the recapitalisation of Denel Aerostructures.  No monies were transferred to the entities during the 2013/14, 2014/15 and 2016/17 financial years.

The department was allocated R274.0 million at the beginning of the 2016/17 financial year.  The budget allocation decreased by R6 million during the Adjusted Budget Appropriation in October 2016.  Of the allocated budget of R268 million, R253.8 million was spent, resulting in an amount of R14.2 million or 5.3% not being spent. The unspent balance of
R14.2 million will be surrendered to the National Revenue Fund (NRF).[2] 

4.1 Financial performance 2016/17

Table 3. Quarterly Expenditure for the 2016/17 financial year

Source: Department of Public Enterprises (2017)

• Expenditure Management: Effective steps were not taken to prevent irregular expenditure amounting to R3.1 million, as required by section 38(1)(c)(ii) of the Public Finance Management Act and Treasury Regulation 9.11.

With regard to the Internal Control environment, the AG highlighted Leadership as an additional matter, stating that the Accounting Officer did not exercise adequate oversight responsibility regarding financial reporting and compliance and related internal controls.

The Department was able to correct the above findings during the 2016/17 financial year, and received an unqualified audit with no findings.  The Departments audit is done by the Auditor-General of South Africa.

4.2 Entities

The Department’s overall objectives are to provide an effective shareholder management system and to support and promote economic efficiency within each of the state-owned companies (SOCs).  The performance of SOCs has been varied in the period under review.  It is also important to note that the economic environment under which SOCs operate has been negative.

The financial performance is evidenced by the service delivery done by the entities and enumerated in section 5.  Section 5 highlights the performance of the entities in relation to their financial performance.

4.2.1 Alexkor

The entity reported a net profit of R31 million, an improvement on the loss it reported in the previous year.  Consolidated revenue increased from R197 million in 2016/17 to R386 million in the 2016/17 financial year.  Alexkor commissioned deep sea operations during the 2016/17 financial year, which improved carat production to over 162 000 carats being produced, compared to 45 000 carats produced in the previous financial year. The commissioning of the deep sea mining operations improved the performance of the joint venture significantly.[3]    

During the 2015/16 financial year, the entity continued to receive an unqualified audit opinion, an emphasis of matter was raised and numerous new findings were contained in the auditors’ opinion for 2015/16.  The emphasis of matter related to the financial statements being done in accordance with International Financial Reporting Standards (IFMS) and did not adhere to the Public Finance Management Act although the entity received approval for this from the National Treasury.  With regards to Compliance with legislation, the AG highlighted procurement and contract management, expenditure management, and consequence management.  With regards to Internal Control the audit highlighted issues relating to leadership.

During the 2016/17 financial year, the entity received an unqualified audit opinion with findings.[4]  The entity seemed to have regressed from the previous’ years findings, as additional matters were raised concerning its pre-determined objectives which was not raised in the 2015/16 financial audit.  The entities audit was undertaken by Sizwe Ntsaluba Gobodo (SNG).

4.2.2 Denel

The entity is exposed to high contingent liability risk. Under the period under review, Denel was unable to repay the government-guaranteed debt amounting to R1.85 billion. The main attribute to the failure to meet the set repayment deadline, was governance crisis and corruption. The malpractices at Denel forced government to extend the repayment period to 30 September 2018.

Revenue decreased slightly from R8.2 billion in 2015/16 to R8.1 billion in 2016/17, due to most programmes moving from development into production phase, resulting in increased activities.  In line with this, the entity’s profit decreased from R395 million in 2015/16 to R334 million in 2016/17, although accumulated profits have not translated into cash in the bank.  High costs of production, high levels of work in progress and finance costs have contributed to the low net profit levels.[5]

Denel’s assets are mainly financed by debt, which consists of government secured debt of R1.85 billion and unsecured debt.  Liquidity challenges have resulted in the entity relying on prepayments to fund working capital requirements. 

According to the Auditor-General (AG) of South Africa, during the 2016/17 financial year, the entity received an unqualified opinion with findings on its compliance with laws and regulations.[6] However, there is a dispute between Denel and the AG on the audit opinion. In a Committee meeting with the AG on the Department’s and SOCs audit outcomes, the AG revealed that they had appointed Sizwe Ntsaluba Gobodo (SNG) as Denel’s auditors.  During their review of SNG’s audit opinion, they were of the opinion that the audit should include a finding on the entity’s irregular expenditure.  When SNG committed this to Denel, they met resistance from Denel executives to change the audit opinion.  Denel subsequently published the incorrect audit opinion, which was tabled in Parliament. The Office of the AG then tabled a formal letter to the Committee that informed the Committee that the financial statements that were tabled by Denel were the incorrect ones, as the company refused to effect amendments made by the auditors before adoption of the report.  The Committee resolved to have a meeting with the AG, Denel and the Department to clarify this matter, as it was very concerning that an entity does not comply with a Chapter 9 institution.  This event has called into question the standard of the audits done at government institutions. 

Denel had to dissolve the establishment of Denel Asia which it established in 2015 without the approval of the Minister of Finance.    Denel established Denel Asia, a joint venture with VR Laser Asia, in order to take advantage of the eastern defence market, which is in a growth phase.  This incident caused reputational damage to the entity, and called into question the integrity of the board, specifically that of the Board Chair, Mr Dan Mantsha, and executives at Denel.  This has prompted the Committee to include Denel in its inquiry into the governance of SOCs.  The Committee will specifically look into the establishment of Denel Asia, the appointment of board members and executives, and any other related matter the Committee feels it needs more clarity on.

4.2.3 Safcol

The South African Forestry Company (Safcol) had a challenging year in 2015/16, given that a completely new board was appointed to the entity, with both its Chief Executive Officer and its Chief Finance Officer leaving their posts in December 2016.  The entity was also investigating allegations of the possible misappropriation of the entity’s assets, the case has now been reported to the South African Police Department.  Financially the entity incurred an operating loss of R125 million due to the restatement of minority shareholdings (non-current assets held for sale), and property, plant and equipment.

During the 2016/17 financial year, the entity is still struggling with instability at management level with the entire Executive Committee positions vacant.  The company was also unable to meet any of the strategic targets as agreed in the 2016/17 shareholder compact.  Despite this the entity was able to grow revenue to R1 billion, the highest in five years.  This 14% growth in revenue is due to increased selling prices and volume of logs.  This resulted in SAFCOL reporting an operating profit of R123 million and net profit of R107 million for the year.[7] 

Safcol is still overseeing Industrias Florestias de Manica (IFLOMA), its Mozambique subsidiary, which is still under care and maintenance, its future is still under discussion at Safcol. Safcol is currently implementing its own turnaround strategy. Safcol is still struggling to operate on land that is affected by land claims, which affects 61% of the land Safcol operates.

In the 2015/16 financial year, Safcol received an unqualified audit opinion with findings from the Auditor-General.  However, the entity has regressed during the 2016/17 financial year, receiving a qualified audit on its financials with material findings on its pre-determined objectives and compliance with laws and regulations.[8]

4.2.4 Eskom

During the 2014/15 financial year, Eskom continued to face multiple challenges.  These challenges included the constrained electricity system, the maintenance backlog and ageing infrastructure, the funding shortfall created by the Multi-Year Price Determination (MYPD3) as well as low electricity tariffs, the increased cost of generating electricity, the delays in the new build programme and an uncertain future regarding new generation.  In November 2014, Eskom developed a Turnaround Strategy to apprehend the operational and financial decline and stabilise the business. Since then Eskom has managed to stabilise the business by improving plant performance, minimising the risk of load shedding, maintaining their liquidity position and improved the financial performance. 

However, the 2016 financial year has been marred by controversy for the entity.  This includes the sudden resignation, and then reappointment of the Chief Executive Officer (CEO), Mr Brian Molefe; the suspension of the Acting CEO, Mr Matshela Koko; the suspension of the Chief Financial Officer, Mr Anoj Singh; and the mass exodus of Eskom non-independent board members, where 5 board members resigned during the year.  This was then followed by Eskom’s board chair, Mr Baldwin Ngubane, resigning form the board on 12 June 2017. 

Not only does the entity face leadership, governance and reputational damage due to the above circumstances, the entity received a qualified audit opinion based on that fact that Eskom could not adequately identify and recognise all irregular expenditure.[9] Consequently, the auditors were unable to determine whether any adjustment was necessary to the balance of irregular expenditure stated at R3 billion in the financial statements.  The entity’s audit was undertaken by SNG as well.

The tariffs increase request by ESKOM need to be observed critical taking into account poor financial governance experienced at the entity. Furthermore, any unjustified tariff increases under the current governance crisis in SOCs, low economic growth environment would bite industries and households. Most important step that need to be taken: restore governance at ESKOM. Tariff increases cannot be used to cushion ESKOM against ‘self-inflicted’ poor governance decisions and malpractices. The increase on tariffs could have significant fiscal implications, and further affect the entire economy.

What does it mean of ESKOM in failing to signed take-off agreements with the Independent Power Producers? This would invite NERSA to issue penalties against ESKOM, and thus erode the revenue, and increase reputational risk. Furthermore, it would have a negative effect on the following objectives:

• Create new jobs and attracting investment,
• Stimulate national and regional economies, building industrial base for local economic development,
• Partnership with other industry players such as higher education, SMMEs, and supporting broader economic and social development initiatives
• Help the environment (through cost effective carbon pollution reduction and the potential for energy resilience as the climate changes), 
• Deliver customer and government value, and
• Allow for efficient operation of the energy market, thus there is a need to create competition in the electricity industry. 

Profitability of ESKOM should not trump other government strategic policy goals. Government needs to remove any existing policy and regulatory barriers that affect the development of the renewable energy industry. The renewable energy industry should be used to maximise/leverage broader government support programmes to support regional economies and add to lift employment, and poverty reduction initiatives. Government need to protect private sector investment in small and large scale renewable projects.

4.2.5 Transnet

The entity’s focus for the 2016/17 year was on the continued implementation of the Market Demand Strategy (MDS).  Transnet was able to achieve R21.4 billion capital investment for the year in the context of weak economic fundamentals. Despite the steep fall in commodity prices, stagnant global and domestic economic growth and a significant decline in customer demand, Transnet was able to achieve aggregate volume performance of 95%, an increase on the 90.3% achieved in the prior year. Transnet continued to demonstrate financial stability during the year, enabling it to continue the execution of the MDS, although at a slower pace due to the global economic slowdown.[10]

Yet Transnet failed in 2016/17 to meet approximately 48% of the performance targets it had set itself, a further deterioration, as it failed to achieve 42% in the previous financial year. The Auditor-General found that the performance indicators themselves were not well defined, specific and measurable.  This is the same finding highlighted in the 2015/16 financial year.[11]

Transnet received an unqualified audit with findings on their predetermined objectives and on compliance with laws and regulations. With respect to compliance with laws and regulations the audit found that no effective and appropriate steps were taken to prevent irregular and fruitless and wasteful expenditure, with amounted to R922 million and R21.9 million respectively.[12]   The entities audit is undertaken by SNG.

The South African economy has been characterised by high levels of economic concentration, some of the public state entities continue to enjoy dominance positions in various industries. 2016 Budget review emphasised that competition should be promoted in various industries in the economy, and thus would improve efficiency and competitiveness and further increase investment levels, entrepreneurship and employment. To this end, there is a need to accelerate implementation of the National Commercial Ports Policy, 2002 and the National Ports Act, 2005 including the National Freight Logistics Strategy, 2005. The policies advocate for new institutional framework to separate the Ports Authority and Ports Terminals from the Transnet Group, to enhance competition in the ports, and furthermore boost private sector participation. Over the medium term, the Committee would need to pay particular attention that this policy initiative is implemented.

4.2.6 South African Express Airways

At the time of tabling the Budget Review and Recommendations Report for 2017 the entity had not as yet tabled their 2016/17 Annual Report to parliament due to the fact that the status of “going concern” could not be guaranteed.

During the 2016 financial year the airline was granted an extension of an existing guarantee of R539 million and R567 million, which allowed them to table the 2015/16 Annual Report and Financial Statements.

During the 2015/16 financial year, the entity received revenue amounting to R2.39 billion,
7% less than the revenue of R2.59 million received in the 2014/15 financial year, in line with a 7% drop in passenger numbers.  Due to the company’s Cost Containment and Revenue Enhancement Programme, the company declared a net profit of
R16.9 million after tax.[13]   

The entity received a qualified audit opinion on the financial statements with material findings on their pre-determined objectives and compliance with laws and regulations, from the Auditor-General.[14]

The Committee has raised serious concern regarding the performance of SAX, especially due to the “going concern” issues the entity has faced, and the inability of the entity to table its financial statements to Parliament by 30 September each year.  The entity has not been able to table their annual reports timeously since the 2012/13 financial year.  The issue regarding the merger of SAA, SAX and Mango needs to be resolved as a matter of urgency. 

4.3 Department of Public Enterprises’ financial performance for 2017/18

The Department had a total budget of R266.7 million for the 2017/18 financial year of which R58.5 million or 18.2% has been spent for the period April to June 2017.  This is lower than the projected expenditure of R60.4 million for the first quarter.  This compares favourably on the R54.3 million or 19.8% spent in the first quarter of the previous financial year. 

The majority of the Department’s budget is spent on compensation of employees and Goods and services.  Of the R166.9 million budgeted for compensation of employees, R34.2 million or 22.5% has been spent, lower than the projected R39.7 million due to unfilled vacancies.  An amount of R96.9 million has been allocated for Goods and Services, where R13.9 million or 14.3% was spent in the first quarter against a projected spend of R18.8 million due to lower expenditure on line items associated with the slow filling of vacancies.

The majority of the budget was spent on the programme Administration.  The programme has an appropriated budget of R155.5 million (58.3% of the total budget), of which
R30.2 million or 19.4% was spent, compared to the R30.4 million or 19.3% spent in the first quarter of the previous year.  The main cost drivers in this programme are compensation of employees, consultants and travel and subsistence.[15]

Programme 2 Legal and Governance was allocated a budget of R25.2 million, of which
R4.2 million or 16.7% was spent in the first quarter. This compares favourably with the R4.1 million or 17.3% spent in the first quarter of the previous financial year.  The main cost driver within the programme is compensation of employees, and travel and subsistence.  The programmes also spends significantly on consultants and is mainly driven by legal assistance from private firms for matters pertaining to the state owned companies.[16] 

Programme 3 Portfolio Management and Strategic Partnerships was allocated a budget of R86.0 million of which R14.0 million or 16.3% of the budget was spent by the end of June 2017, compared to the R18.8 million or 15.3% spent in the same period in the previous year.[17]  The main cost drivers in the programme are compensation of employees, travel and subsistence and consultants mainly for projects which are run for effective oversight of state owned companies. 

As at 30 June 2017, the Department has a headcount of 189 which translates into a vacancy rate of 14.1%.  While vacant posts are spread across all programmes, the programme Administration has a vacancy rate of 13.7%, Portfolio Management and Strategic Partnerships had 14.5% and Legal and Governance has 15%.  The Department has been advised by the National Treasury to expedite the filling of posts especially on the Portfolio Management and Strategic Partnership programme which is core.  The National Treasury advised that the Committee note that the Department is carrying out an organisational realignment process which is targeted to be effected by April 2018.  Filling of vacant posts was put on hold due to the Departmental realignment process. 

4.4       MTEF financial allocations for 2018/19

Table 4. Current Estimates for the 2018/19

Source: Department of Public Enterprises (2017a)

As seen above in Table 3, the projected allocation for the 2018/19 financial year amounts to R277.2 million, a R10.5 million or 3.4% increase.  Programme 2: Legal and Governance sees the biggest increase of nearly 5.0% from R25.2 million in 2017/18 to R26.4 million in 2018/19. Programme 1: Administration is projected to increase by 4.5% while Programme 3: Portfolio Management and Strategic Partnerships increases by 2.7%.

This proposed allocation is subject to confirmation and approval by the Minister of Finance during the National Budget in 2018.

The Department has not submitted any additional requests for funding during the 2017 Medium Term Expenditure Framework budget process. 

4.5 Concluding comments on financial performance

The Department is financially sound as exhibited by achieving unqualified audit opinions for the last eight years.  However, actual expenditure tends to lag behind planned expenditure in the first two quarters of the year.  This is only corrected once the Adjustment Budget is tabled in November.  The reasons given for actual expenditure not meeting planned expenditure include vacant posts due to specialised skill requirements and delays in executing project plans. The Department should try to correct this trend by looking at its planning mechanisms.

Performance against expenditure is addressed in section 6 of the report, however, the Department will have to strengthen its oversight over Eskom and engage on the best way for Eskom to utilise the yearly increase in electricity tariffs.  Implementation of the South African Express turnaround strategy has to be monitored to ensure the desired results by the shareholder.  The Department will have to maintain close oversight over Transnet’s implementation of the market demand strategy.  The future role of Alexkor and SAFCOL will have to be clarified as they work towards stabilisation in their long-term planning.  Denel will have to continue implementing the turnaround strategy to build on the progress they have made during the 2015/16 financial year.  Denel will have to overcome the reputational damage incurred during the Denel Asia saga as well as address allegations against the Board Chairman.  

The Department must provide the appropriate support to the SOCs to overcome the audit findings of 2016/17 in preparation for the 2017/18 financial audit.  Correction measures and plans need to be put to place to address the audit findings.  The Department needs to ensure that processes and procedures are put in place to address entity weaknesses timeously and effectively and efficiently before these issues escalate and become major risks to our sovereign stability.

5. Overview and assessment of service delivery performance

5.1 Service delivery performance for 2016/17

The Department of Public Enterprises provides a distinct mandate of SOCs’ shareholder oversight on behalf of the State. The Department’s mandate is to fulfil oversight responsibilities at these state-owned companies to ensure that they contribute to the realisation of government’s strategic objectives, as articulated in the National Development Plan (NDP), the medium-term strategic framework (MTSF), the new growth path and the industrial policy action plan. State-owned companies are crucial to driving the state’s strategic objectives of creating jobs, and enhancing equity and transformation. The Department’s contribution towards government priorities and outcomes is done through three programmes identified in the organisational structure namely: administration, legal and governance; and programme management and strategic partnerships. The section below discusses programme performance.

1.  Performance Information by Programme

5.2.1 Programme 1: Administration

1. Purpose

Provides strategic management, direction and administrative support to the Department, which enables the Department to meet its strategic objectives.

The programme includes the Ministry, the Office of the Director-General and Support Services. The programmes currently comprises the following sub-programmes: Ministry; Corporate Services; the Chief Financial Officer; Human Resources; Communications; Strategic Planning, Monitoring and Evaluation and Inter-Governmental and Internal Relations and Internal Audit.

1. International Relations

The Department successfully coordinated the Minister’s working visit to Kenya where a Memorandum of Understanding (MOU) was signed on the LAMU Port (Transnet and Mwalimu Ltd). Working visits were undertaken to Vietnam to explore opportunities in the aqua-culture and shipbuilding industries. Visits were also undertaken in Singapore to look at SOCs management, PPPs and the Special Economic Zones during the year under review.

In addition, visits were undertaken to United States of America to benchmark the efforts of the

Department with international best practice in information technology-driven design and innovation. Bilateral engagements were also held with the senior leadership of the key stakeholders in business and government in order to strengthen the partnership between the two countries and to unlock opportunities for SOCs. Furthermore, the Department participated in the BRICS SOC Summit, hosted by the Government of India, to establish a platform of sharing experiences and knowledge in the oversight of SOCs.

1. Information Management

The Department enhanced its IT infrastructure during the period under review. Among those is

“Skype for business” project that has been deployed. This has been in response to the need to enhance efficiencies with the Department and to respond to government’s call to curb expenditure relating to travel and accommodation, in light of the prevailing economic conditions. In addition, the Department upgraded its server, fibre data lines from 4 to 20 megabits per second (Mbps), and internet line from 4 to 10 Mbps. These achievements will enhance the Department’s accessibility to public and will enable ease of communication with stakeholders.

1. Strategy to overcome areas of under performance

Key milestones in the four projects were achieved in the period under review. The SharePoint project is already in the testing phase and therefore, progress registered to date indicates that all four systems will be fully implemented in the 2017/18 financial year. Furthermore, the four projects have been disaggregated in order to ensure that each receives focused attention. Those aligned to relocation of the Department’s offices and re-alignment of the organisational structure are addressed within the domain of external factors that may impact their delivery.

1. Committee Observations

The Committee observed that while there is recorded achievement on international relations, there is nothing reported with regards to key initiatives which followed as a result of the visits. The Department does not outline if the visits form part of South African government policy objectives on international relations. These visits should be quantified in realizable objectives for the Department and State Owned Companies (SOCs). The Department embarked on a review of its APP targets. It reduced its strategic objectives from five to four due to budget constraints. Out of its two identified strategic objectives, the Department achieved one in this programme. No achievement was recorded on strengthening and enhancing internal process flows and systems. Achievement was recorded for the support service delivery through implementation of the Inter-Governmental engagement and programme. The strategic objectives identified do not consider sub-programmes identified by the Department in its programme overview. Therefore, there’s no golden thread provided between the setting of strategic objectives, performance and expenditure.

The role of sub programmes on Corporate Management, Chief Financial Officer (CFO), Human Resources, Communications, Monitoring and Evaluation and Internal Audit should form part of the broad Departmental planning framework. Managerial roles are found in human resources, information technology, and finance. In this regard more emphasis should be placed on policy development framework to execute the Department’s mandate which primarily is to provide oversight to SOCs. Most of the Department’s policies are governed by MOI and shareholder compacts.

The Department should clearly outline its delegation framework and how decision are taken within the institution to ensure economy, efficiency and effectiveness of SOCs. Human Resources should also design personnel plans, develop performance agreements and evaluations, and design staff attraction and retention policies in order to mitigate the risk of losing critical skills. The role of communication should be strengthened through public education and awareness campaigns. It is critical that the Department use communication to inform communities, youth in particular about education and skills required to work within the public sector and SOCs environment. The Department should create policy, strategy and monitoring mechanism to ensure that SOCs play a role in empowering youth with the requisite skills to participate in industry. This should be done through social compacts with communities, organised labour and business. Communication should also be extended to small and medium enterprises, employment seeking graduates and organised labour. This sub-programme on communication has a role in inclusive development. Stakeholders can hold the Department and SOCs accountable through social contracts. This can lead to greater transparency, legitimacy and address structural challenges caused by apartheid.

The Chief Financial Officer role should be capacitated to also provide financial oversight beyond the scope of the Department. The role of the CFO should be developed to that of providing oversight to SOCs within the DPE. This should be done in alignment to policy and oversight activities in the programme on portfolio on management and strategic partnerships. This can be coordinated through a mechanism such as CFOs forum. This could be a platform for sharing of best practice, corporate planning and monitoring and evaluation for SOCs.

The Director-General has a role in ensuring that intergovernmental relations programmes which the Department is a participant are reported. This includes but not limited to participation in Cabinet, Cabinet Cluster on Economic Sectors, Employment and Infrastructure Development and any other forum that coordinates Directors-General. The current initiatives on SOCs such as the Inter-Ministerial Committee (IMC) on State Owned Entities reforms chaired by the Deputy President, who is responsible for overseeing the stabilization and reform of state owned entities should be aligned in the Department’s planning framework. The Department should play a role in the IMC particularly in the establishment of the Presidential SOCs Coordinating Council, which is intended for better oversight and coordination of state owned companies. The Department should also provide the Committee and progress reports on continual basis on these initiatives.

1. Programme 2: Legal and Governance

a) Purpose

Provide legal services and corporate governance systems, as well as facilitates the implementation of all legal aspects of transactions that are strategically important to the Department and SOCs, and ensures alignment with Government’s strategic intent.

The programme identifies three strategic objectives. The Department reports achievement on the following: strengthening the shareholder function and completion of the achievement of liquidation of Aventura. The programme did not achieve on the target of strengthening of risk management practices within the Department.

b) Committee Observations

The legal and governance programme does not sufficiently address challenges pertaining to the virtual absence of good governance principles in the SOCs. The Department should address challenges experienced by SOCs in their audit outcomes in its risk modelling tool. There is a need for the Department to sufficiently address issues related to regulatory environment of SOCs. The Department should work with the National Energy Regulator of South Africa (NERSA) in the determination of tariff setting with Eskom. The NDP states that the role and effectiveness of regulators needs to be reviewed. In addition to issuing licenses and setting tariffs, regulators need to place more emphasis on stimulating market competition and promoting affordable access to quality services. This will require capacity-building in regulatory institutions. The Department should find a mechanism to work with regulators that ensures SOCs’ inefficiencies do not lead to increase consumer household expenditure and increase to market inefficiencies.

The legal and regulatory framework within which SOCs operate is often complex. If it is not consistent and coherent it can easily result in costly market distortions and undermine the accountability of both management and the state as an owner. The Department should develop a clear division of responsibilities, a streamlining of legal forms together with a coherent and consistent regulatory framework that will facilitate the improvement of corporate governance in SOCs.

5.2.3    Programme 3: Portfolio Management and Strategic Partnerships

a) Purpose

To align the programme is to align the strategies of SOCs with government policy and strategy. It also aimed to align shareholder oversight with Government’s overarching economic, social and environmental policies, and build focused strategic partnerships between SOC, strategic customers, suppliers and financial institutions.

Sub-programme – Energy Enterprises

Shareholder management and oversight of the Eskom business, including the generation, transmission and distribution with particular emphasis on security of supply. Also provides strategic financial and transactional analysis of Eskom. The sub-programme reports that it has achieved on its targets on overseeing delivery of the build programme, support to reduce municipal and residential debt, monitoring improvement in Eskom’s operations to sustain supply of electricity and future role of Eskom in the Electricity industry.

South Africa’s electricity utility made headway on its capital expenditure programme over the past 24 months. One additional unit at Medupi power station and another at Kusile are expected to be in commercial operation by mid-2018, with the remaining units expected to be operating by 2022, adding 10.1GW of electricity to the national grid. Eskom’s financial performance improved in 2015/16 as a result of a 12.7% tariff hike, with revenue increasing by
10.5% to R161 billion. In addition, government’s R23 billion equity injection and the conversion of the R60 billion subordinated loan to equity, have shored up the balance sheet. Higher prices and containment of primary costs improved profitability. Earnings before interest, tax, depreciation and amortisation grew by 37.4% to R31 billion. Government has extended Eskom’s R350 billion guarantee from 31 March 2017 to 31 March 2023. The extension will allow the utility to use the remaining portion of the guarantee to complete its current capital expenditure programme through 2023. As at 31 December 2016, R187 billion of the R350 billion government guarantees had been utilised and it is expected that R218.2 billion will be utilised by 2016/17 year-end. Eskom increased planned borrowings in 2016/17 from
R46.8 billion to R68.5 billion. The increase results from Eskom’s revised assumptions of cost savings and lower-than anticipated tariffs during the current price determination period. From 2017/18, foreign loans are expected to account for 77.3% of Eskom’s total funding.

The scale of tariff hikes and recovery of municipal debt will affect Eskom’s financial position. The utility has appealed a High Court ruling setting aside the regulator’s decision to grant it a 9.4% tariff increase for 2016/17. As at 31 December 2016, municipal arrears to Eskom stood at R9.7 billion, 72% of which was owed by 20 municipalities.

Energy expenditure is expected to total R234.5 billion over the next three years, accounting for about 25% of total public-sector infrastructure spending. Eskom accounts for R203.8 billion, or 87%, of this amount.

Table 5: Eskom Capital Expenditure and Estimates

1. Grid projects involve installation of transmission lines, new transformers and upgrading of substations

2. Other represents a collection of projects to enhance the system at generation, transmission and distribution level including maintenance projects

Source: Eskom 2017

a) Committee Observations

The Department should develop strategies to monitor capital investment over the 3-year period. Municipal debt recovery strategies should be developed in partnership with the National Treasury and the Department of Cooperative Government and Traditional Affairs. An intergovernmental approach is required in consulting with the municipalities that are still in debt. The Department need to develop strategic objectives which address governance, procurement and financial sustainability in Eskom. The NDP states that the role and effectiveness of sector regulators need to be reviewed. It further states that in addition to issuing licences and setting tariffs, regulators need to place more emphasis on stimulating market competition and promoting affordable access to quality services. This will require capacity building in regulatory institutions. The Department together with NERSA should provide oversight to Eskom in executing its mandate in contributing to Outcome 4: decent employment through inclusive economic growth, Outcome 6: an efficient competitive and responsive economic infrastructure network, and Outcome 10:  environmental assets and natural resources that are well protected and continually enhanced.

During the 2016/17 financial year allegations of procurement irregularities have surfaced concerning Eskom.  These allegations include the following:

• Eskom’s alleged role in ensuring Tegeta was able to buy Optimum Coal Holdings;
• Eskom’s award of an estimated R11.7 billion coal-supply contracts at inflated prices to Tegeta Exploration and Resources (Pty) Ltd between 2015 and 2016;
• The R43 million contract with Media Company, TNA (Pty) Ltd;
• The R400 million contract with Trillian Capital Partners for management consulting and advisory services;
• Allegations of impropriety against the Acting CEO, Mr Matshela Koko, who awarded contracts amounting to R1 billion to Impulse International, of which his stepdaughter was a director.

The above allegations will form part of the Committee’s inquiry into Eskom.  These allegations have also thrown the cost at which Eskom is paying for coal into relief.  Questions has been raised regarding the cost of coal at Eskom.

Towards the latter part of the 2016/17 financial year, Eskom faced even more damaging allegations of shockingly poor governance and rampant abuse of state resources.  On 2 November 2016, the Public Protector of South Africa, Advocate Thuli Madonsela, published her full 'State of Capture' report in which Mr Brian Molefe, the then CEO of Eskom, was implicated in assisting the Gupta family in buying Optimum Coal Mine using his position as CEO at Eskom to influence the deal.  On 11 November 2016, Mr Molefe issued a statement stating, “I have, in the interests of good corporate governance, decided to leave my employ at Eskom from 1 January 2017.”  Essentially, it seemed to the public that Mr Molefe had resigned from his position as CEO of Eskom.  On 23 February 2017, Mr Molefe was sworn in as a Member of Parliament for the African National Congress (ANC). 

On 12 May 2017, the Eskom board confirmed that Mr Molefe would return to Eskom as CEO following a dispute about his pension payout. Mr Molefe’s resignation as a Member of Parliament was confirmed on 12 May 2017, effective from 14 May 2017.  Questions were raised about a R30 million payout after Mr Molefe resigned as CEO in 2016.  In a statement by the Minister of Public Enterprises she stated that “after considering various options, the Board proposed that Mr Molefe returns all monies received on his departure from Eskom on 1 January 2017 and is reinstated as Group Chief Executive with immediate effect.”  The reason given for his reappointment was that Mr Molefe had erroneously taken early retirement and upon realising this mistake, the board had rescinded his early retirement. There was a huge public outcry about the R30 million payout and the process leading to the reinstatement of Mr Molefe.  However, subsequent to the above reappointment of Mr Molefe, on 31 May 2017, the Minister of Public Enterprises directed the Board of Eskom to rescind its decision to reinstate Brian Molefe as CEO. 

The Committee then held a meeting with the Eskom board on 23 May 2017 to receive a briefing on the following:

• The process followed in the reappointment of the former Group Chief Executive Officer (GCEO);
• The determination of retirement package by the Board of Eskom.

However, the Committee was not satisfied with the explanations provided and resolved to include this matter in its inquiry into the governance of SOCs.  As stated above, this process started on 17 October 2017. 

The Committee is also concerned with the sustainability of Eskom given that they have been designated to roll-out the country’s nuclear programme.  The Committee is concerned that this will place a further strain on the company’s financial sustainability.  The announcement by Eskom’s CEO that they will not be signing any further Independent Power Producer agreements in 2016 due to the cost burden on the country needs to be addressed.  The company states that the cost of the IPPs is more expensive than coal-generated electricity and therefore would not consider signing new IPPs until such time as there was a new agreement between the Department of Energy and themselves regarding this.  The Committee is concerned that this matter has been outstanding for more than a year, and no resolution has been found.  This has placed the IPPs in a precarious situation and the countries IPP programme in jeopardy.  This matter needs to be addressed as a matter of urgency.

Sub-programme – Manufacturing Enterprises

This programme includes Denel, Alexkor and South African Forestry Company (Safcol). It further provides the Minister with operational, operational and capital programme analysis compacting for planning, monitoring and evaluation of SOCs’ performance. All the strategic objectives in this sub-programme were achieved.

Denel

The State-owned company has grown exponentially over the last few years, more than doubling its revenues from R3.9 billion in 2013 to R8.2 billion in 2016. The company is set to grow even further over the next three years. Funding this growth is going to be a challenge that the Department is assisting the SOC to bridge. In May 2017, Fitch Ratings affirmed Denel’s national long-term and short-term ratings are positive. This is a vote of confidence to the turnaround. The Department is working with Denel on a process to reduce the reliance of governance guarantees to access the capital markets.

The Department’s oversight on Denel Aero structures has assisted the company over the years to reduce claims against the 2007 Indemnity Agreement. Over the past 8 years the value of the claims has declined from R222 million per annum in 2007 to R33.1 million in 2015. In 2016/17 Denel Aerostructures, for the first time, put a zero claim against the
R1.6 billion Denel Aerostructures Indemnity Facility which was set up in 2006 in relation to the Airbus A-400M contract. This is evidence of the maturity of Denel Aerostructures as a reliable and supplier of complex systems to global original equipment manufacturers.

a) Committee Observations

On Wednesday, 11 May 2016, the Portfolio Committee on Public Enterprises called Denel to account for the establishment of the subsidiary company, Denel Asia, which according to media reports had been established without Ministerial approval.  The establishment of Denel Asia also coincided with the suspensions of three top executives.  Due to the limited time available to the Committee, the Committee decided to continue the discussions at a later date, which would include the National Treasury (NT) and the Department of Public Enterprises (DPE).  The subsequent meeting was held on 7 September 2016 as a joint meeting between the Portfolio Committee on Public Enterprises and the Select Committee on Communications and Public Enterprises.  However, representatives from the National Treasury was not present at the meeting, therefore the meeting was only attended by the Department and Denel.  The Committee therefore was not able to get the proper clarity that it required regarding the establishment of Denel Asia.  Further to this, Denel’s Board Chairman, Mr Dan Mantsha, was also accused of using his position as Chairman to suspend three executives, the CEO, the CFO and the Company Secretary in order for the Denel Asia deal to be approved. 

Subsequently the Committee decided to include these matters in their inquiry into the governance of SOCs, Denel forming part of phase 3 of the inquiry. During 2017, it was reported that Denel had deregistered Denel Asia as a company. 

Alexkor

During the 2016/7 financial year, the Department competed the desktop study on the Richtersveld Diamond Deposit. Further extensive studies are envisaged on diamond resources to improve levels of confidence and to determine the mineral wealth within the Richtersveld mining concessions. Alexkor continued to experience operational challenges during the 2016/17 financial year. The carat production target was not achieved for the year under review. The deep-sea mining commenced in April 2017. Despite the challenges experienced during commission stages, the deep-sea operations produced 112 047 against the budget of 120 000. The diamond operations revenue increased from
R386.5 in the year 2015/16 to R758 million for the financial year.

Alexkor has identified the following risks which may impact on its future sustainability:

• Insufficient operational cash which could impact on Alexkor’s ability to fulfil its short- and long-term obligations, e.g. operations, Deed of Settlement (“DoS”) and strategies.
• Compliance with the Deed of Settlement is a risk because the settlement is outside the control of Alexkor and lies with third parties, and failure to work together may have repercussions.
• Absence of technical and operational information (e.g. geological model information, life of mine information) and the limitations which this causes in terms of informed decision-making.

a) Committee Observations

The Committee is concerned with the future sustainability of the entity, as diamond production is predicted to fall during the next financial year.  Additionally, according to the Deed of Settlement, Alexkor needs to have an exit strategy as their
51% shareholding of the company needs to be transferred to the community in a socially responsible manner.  The issues surrounding the payment of R45 million to the community also needs to be resolved.

Safcol

Safcol remains financially stable and is able to sustain itself without government support. The Board has developed a growth strategy which has been assessed by the Department and approved by the Minister. The Board further developed a structure for implementation and has commenced with the sourcing of talent to populate the structure.

Safcol’s annual report states that a key governance concern and a major focus area for the Board over the short- term is the qualified audit of Safcol’s financial statements received for the period under review. The qualification primarily relates to irregular expenditure identified by the Auditor-General. Safcol targets zero fatalities, but unfortunately three fatalities were reported during the past year. Two of the fatalities were directly linked to the manual chainsaw harvesting activities. The management structure still has a number of acting positions in key roles. Approximately 61% of land in operation is subject to land claims from communities. This presents a material risk to the longevity and sustainability of the SOC’s operations.

a) Committee Observations

The Committee is concerned about the future sustainability of the entity, and the high turnover of executives at the entity.  The Department needs to ensure that key posts are filled and that the strategy with regards to IFLOMA is addressed.  Safcol is key is providing rural development and local economic development.  The Department must ensure that Safcol contributes to these government priorities.

b) Strategy to overcome areas of under performance

Since 2012/13, the Department has been having monthly meetings with the SOCs’ executives to ensure the implementation of agreed plans. These have enabled quicker interactions with principles where required. The business should, for the first time in 2016/17 breach R1billion turnover. It is also expected to report an operational profit, which will establish a solid base for sustainability.

Sub-programme – Transport Enterprises includes South African Airways (SAA), South African Express (SAX) and Transnet. The purpose is to align corporate strategies of Transnet and SAX with Government’s strategic intent and benchmark their financial and operational performance. All the strategic objectives in this sub-programme were achieved.

South African Express

The Department, in partnership with NT, was instrumental in undertaking a process of developing an optimal corporate structure. This involved the alignment of the operations and ownership of State Owned airline, namely SAA, SAX and Mango. The project is an achievement milestone as it is aimed at addressing the structural challenges that are impacting on the performance of the State Owned airlines. Consultations will engage various stakeholders in the 2017/18 financial year to finalise the optimal corporate structure.

In its annual report SAX states that, “the statement of financial position remained weak as the company ended the year with a cash and cash equivalents of R57, 1 million when compared with a positive balance R23,9 million in 2015, due to the ongoing settlement of outstanding creditors”. The accounting treatment for maintenance reserves is consistent with last year, and the company has obtained an updated independent technical opinion on the methodology used. This has been a point of disagreement with the auditors, and led to a qualification of the results in 2015. Management is accounting for the treatment in line with the requirements of the International Accounting Standards, and stresses that the technical opinion received confirms this position. The auditors have accepted the new opinion obtained but a dispute still exists on the accuracy and classification of the capitalised maintenance reserves.

The weaker ZAR/USD exchange rate impacted negatively on USD based costs, including network cost and SAP transaction costs. Outstanding trade creditors have decreased by R61.2 million, but there is substantial pressure on the company to address this issue with key suppliers. The balance sheet indicates that the company is in need of urgent recapitalisation, by way of permanent equity funding, as the balance sheet cannot bear more debt in order to purchase aircraft. Short or long term debt funding will further hamper the profitability of the company. The company has been granted an extension of the working capital and equity covenants guarantees, as well as additional working capital guarantees to ensure the airline meets the requirements of a going concern, as well as addressing its immediate cash flow needs.

The airline was grounded for 40 hours on 1 May 2016, due to documentation issues relating to reportable incidents. This had a profound effect on the airline, as the market perception was adversely affected. In addition, the spares removal and replacement procedures were redesigned which led to delays in returning aircraft to service. This, together with major scheduled maintenance has severely hampered operations and profitability in the 2017 year. The airline has also parted ways with the CEO, effective March 2017 after 13 years of service in the company.

a) Committee Observations

As stated above, the entity has not tabled its annual report and financial statements timeously to Parliament since the 2012/13 financial year.  This was due to doubt cast on the entity‘s going concern status.  According to the airlines new CEO the airline needs to be recapitalised in order for it to be sustainable going forward.  The Whole of State aviation strategy needs to be finalised in order to merger SAA, SAX and Mango airlines. The Committee is very concerned about the sustainability of the airline in the absence of further guarantees. In the face of these challenges, SAX will need to radically transform the business or wallow in continued crisis.

Transnet

South Africa’s freight rail, ports and pipelines utility grew revenues by 1.7% to
R62.2 billion during 2015/16. Capital investment amounted to R34.3 billion, including R8.8 billion for locomotives, R2.3 billion for wagons, R2.3 billion to sustain rail infrastructure and R1.3 billion for a new multi-product pipeline. Transnet reported freight rail volume of 214.2 million tons, down from 226.6 million tons in the prior year.  The entity continues to pursue its Road-to-Rail strategy, to move tonnage from the road to rail.  Its capital investment programme focuses on upgrading and modernising ports, rail and pipeline infrastructure. In the five years ended 2015/16, Transnet had spent R122.4 billion on capital expenditure. Transnet has adjusted to the weak economic environment by rescheduling part of its capital spending plans. Over the next seven years, it plans capital investments of R273 billion, to be funded by earnings and borrowings against its balance sheet. Foreign borrowing will decline. Transnet continued to mitigate the impact of slow economic growth through stringent cost-containment measures and working-capital management, containing operating costs at R37,9 billion (2016: R35,9 billion), a 5,6% increase. This resulted in a R2,4 billion saving in planned costs. As a result, earnings before interest, taxation, depreciation and amortisation (EBITDA) – Transnet’s key measure of profitability – increased by 5,0% to R27,6 billion (2016: R26,3 billion). The EBITDA margin decreased by 0,2% to 42,1% (2016: 42,2%).

Transnet maintained financial stability and agility by optimising capital expenditure based on validated demand, with our capital investment for the year amounting to R21,4 billion (excluding capitalised borrowing costs), representing a 27,5% decrease from the prior year (2015: R29,6 billion). The capital investment for the year represents R5,2 billion invested in the expansion of infrastructure and equipment, while R16,2 billion was invested in maintaining capacity in the rail and ports divisions.

Government and state-owned companies plan to spend R327.7 billion on transport and logistics over the medium term. This accounts for 34% of total public-sector infrastructure expenditure during this period. These investments will improve the national transport infrastructure network, enhance the mobility of people and services, reduce transport costs and facilitate regional trade. Revenues from services provided by state-owned companies will help fund infrastructure investment, complemented by national and provincial allocations for road construction and maintenance for the non-toll network. Transnet’s capital expenditure is expected to total R118.4 billion over the next three years.

Table 6: Transnet capital expenditure and estimates

Source: Transnet

In its integrated report, Transnet notes that international rating agency, Standard & Poor’s, has lowered the Company’s foreign currency rating to BB+ from BBB- and the local currency to BBB- from BBB, both with a negative outlook. On 13 June 2017, Moody’s also lowered the Company’s rating to Baa3 with a negative outlook. Both these actions were due to the rating action on the Sovereign as Transnet is viewed to be closely linked to the Government. The company has evaluated the potential impact on the Company’s financial position, liquidity and solvency and do not expect significant negative effect on estimates. S&P has further indicated that Transnet’s liquidity was still adequate and has acknowledged the sound relationship it has with South African banks. The agency also recognised the Company’s good standing in capital markets, its sufficient risk and management framework, and its unused credit facilities.

a) Committee Observations

Transnet is another SOC that has experienced challenges caused by procurement irregularities in the following contracts:

• The tender to purchase 1 064 locomotives at a value of R50 billion.  It is alleged that Tequesta (Pty) Ltd received R5.3 billion as an advisory fee on this contract from China South Rail (CSR), which is one of the companies that won the tender.
• Contracts worth over R300 million to Regiments/Trillian for advisory services.
• Contracts with Neotel, in which Neotel paid a company called Homix approximately
  R91 million for assisting them in getting specific contracts with Transnet.
• Contracts worth R570 million for cranes delivered in 2012 by Shanghai Zhenhua Heavy Industries (ZPMC), where it is alleged that crane prices were inflated to include “commissions and fees”, which was paid to JJ Trading (JJT).  This payment was to ensure that ZPMC won the tender from Transnet.
• Allegations against Transnet suppliers such as SAP, Software AG, McKinsey, CSR, Liebherr-Africa paying commissions to third parties after securing contracts with Transnet.
• Allegations that R232 million was misappropriated by Regiments Capital (Pty) Ltd from Transnet Second Defined Benefit Fund.

The Committee resolved to investigate these allegations against Transnet in the second phase of its inquiry into governance at SOCs.  These will also address undue influence and possible conflicts of interest that might have occurred as a result of Board and Executive complacency.

Sub-programme – Economic Impact and Policy Alignment

The purpose of this sub-programme is to align shareholder oversight of SOCs in relation to overarching government economic, social and environmental policies and implement strategic interventions to contribute towards achievement of national objectives in support of economic growth and transformation. The sub-programme achieved all strategic objectives set with the exception of development of black industrialists and enterprise development programme.

The comprehensive high-level socio-economic impact assessment for selected projects for Safcol and Eskom was completed. In addition to a Departmental Research Policy, papers focusing on macro and industry specific research were developed, approved as well as presented to EXCO. Fifteen Memoranda of Understanding were signed with various South African universities to assist the Department to complete the work it does not have the capacity to complete internally. Regarding the macro-economic impact model, the framework for this model was developed, advertised and presented to EXCO. Terms of reference (for the impact model) were developed, advertised, bids were received, evaluated and are currently with the bid adjudication committee. The Air Quality and Compliance Forum meeting has helped expedite the processing of Water Use licences for SOCs.

a) Strategy to overcome areas of under performance

Service Level Agreements for the Black Industrialist Project will be fast-tracked in the 2017/18 financial financial year. Tertiary institutions will be used to development the concept for the project.

Sub-programme – Strategic Partnerships

The purpose of the sub-programme is to drive relationships between SOCs, key customers and supplier sector to transform sectoral and social composition of the economy. The sub-programme reported achievement on fast tracking delivery of build programme while it didn’t achieve on the strategic goal on ensuring SOC financial sustainability.

In the previous year the Department reported that, the review of the financial position of SOCs was undertaken and the identification of gaps for financial sustainability as well as potential options for the delivering on capital programmes. This was done through an analysis of the future of the newly established BRICS bank. The analysis was based on what the bank would bring in improving the financial positions of the SOCs within the DPE portfolio, particularly for Eskom and Transnet. The Department has also participated in the finalisation of the Private Sector Participation Framework which was led by National Treasury as the lead on the Private Sector Participation Framework. The planned target for 2016/17 on the development of capital structure optimisation strategy for the Department’s portfolio was not achieved. The reasons stated for non-achievement is that further consultation is still required on the capital structure optimisation strategy. The Department has put in place periodic sessions on investment funding as platform to achieve the desired goal.

a) Committee Observations

The Committee has serious concerns regarding the exposure of the entities within the Department’s mandate to government guarantees.  Given the high exposure to government guarantees coupled with governance issues, specifically the high level of procurement irregularities at these entities, exposes the government fiscus to risk and a further downgrade of the sovereign investment grade.  This will make it more difficult for government entities to borrow from the open market, and at higher interest rates, putting more pressure on the fiscus. All this will have knock-on effects on the economy at large, and make it even harder for the poor and poverty stricken to survive.  Thus the Committee takes its decision for the inquiry into the governance very seriously as it is aware of the damaging effect these allegations has on the sovereign and the people of South Africa.  The Committee is aware that the management and/or mismanagement of SOCs has huge implications on the fiscus of South Africa.  In this vein, the Committee urges the Department to work closely with the National Treasury to find a solution to entities requiring government guarantees in order to sustain their viability.

5.3       Concluding Comments on Service Delivery Performance

The Department indicated that it has completed its organisational re-alignment exercise to strengthen and enhance the existing structure. The re-alignment process sought to drive operational efficiencies so as to improve the Department’s ability to support its oversight functions of the SOCs. The Department’s initiatives to reform governance of the SOCs informed the review of the organisational architecture to determine the extent to which the Department is structurally configured to deliver on its mandate. The development of the business case of the organisational architecture and the post establishment structure was finalised. The overall vacancy rate at the end of the financial year 2016/17 remains high at 14%. The Department has 223 posts approved on the establishment, while number of positions filled is 191. At the senior management (level 13-16), a total of 27 posts remain unfilled by the Department. The Department has three acting Deputy Directors-General (DDGs) responsible for key sub-programmes namely: Corporate Management, Energy Enterprises, and Transport Enterprises. These positions require critical skills and should be filled with urgency in order for the Department execute its mandate and perform optimally.

The Department further developed Enterprise Risk Management (ERM) architecture aimed at ensuring that the Department maintains sound risk management practices that support the implementation of the overall organisational strategy that is aligned to the NDP. The ERM architecture provides a synopsis of the inputs, policies, processes and structures that inform the overall risk management activities of the Department.

The Department has identified strategic risks associated with the annual performance targets as follows:

• Delays in procurement processes
• Critical skills and capacity management
• Stakeholder cooperation and support
• Delays in verification of assets belonging to the State
• Inadequate policy alignment
• Misalignment of the DPE and DOT strategy review processes
• Assessment of the geopolitical risks.

The Department needs to improve by setting strategic objective in relation to all sub-programme. SOC oversight remains a high priority for the Department. This demands that mitigating strategies for addressing governance, operational effectiveness and financial viability be developed speedily. The role of Director-General and Chief Financial Officer (CFO) should be executed beyond coordinating the Department’s internal control environment. The Director-General and CFO have a transversal role in their nature of coordinating SOCs compliance with key legislative mandates and financial statutes.

6. Service delivery and Financial performance assessment

In the previous year, the Department of Public Enterprises spent 99.8% of its budget, and received an unqualified audit opinion with findings. This year the Department spent 94.7% (R253.8 million) of its total budget.  The under expenditure of 5.3% (R14.2 million) primarily relates to compensation of employees resulting in vacant posts. Virements of R1.2 million were made between three programmes during the adjustment budget in September 2016. This was due to the function shift which resulted in movement of posts within the Department. There was not roll-over submitted to the National Treasury (NT).

The Department has no unauthorised expenditure. Fruitless and wasteful expenditure of R14 886.50 was incurred during the 2016/17 financial year and consists of matters related to travel and accommodation expenditure such as non-arrival charges (no shows) and cancellation fees.

The department should monitor the SOCs financial aspects and its impact on their viability. The National Treasury in its 2017 Budget Review notes that over the medium term,  the level of exposure (the amount that the state-owned companies have borrowed against their guarantee) is expected to rise by R52.5 billion. The main changes to guarantees were:

• Eskom is expected to use R43.6 billion of its guarantee in 2016/17 and R22 billion annually over the medium term.
• SAA has used R3.5 billion of a R4.7 billion going-concern guarantee, with the remainder likely to be used in 2017/18.
• The South African National Roads Agency Limited used R2.9 billion of its guarantee in 2016/17, increasing exposure to R30.1 billion. The full guarantee is expected to be used by 2018/19.
• The South African Post Office increased its exposure by R2.6 billion in 2016/17, utilising nearly all of its R4.4 billion guarantee.

Guarantees to some state-owned companies remain a major risk to the fiscus. The Department needs to develop mitigating strategies to restrain SOCs’ over exposure reliance on guarantees.

Table 7: State Owned Companies Guarantee Exposure                                        

Source: National Treasury 2017

The ratings agency, Standards and Poor, expects guarantee utilizations to reach R500 billion in 2020, or 10% of 2017 GDP. The utilizations are dominated mainly by Eskom (BB-/Negative-), which benefits from a government guarantee framework of R350 billion, about 7% of 2017 GDP. The ratings agency estimates that Eskom will have used up to R300 billion by 2020. South Africa’s energy regulator has capped Eskom’s permitted 2017/2018 tariff increase at 2.2% – with negative implications for its financial performance. Eskom will fund the resulting revenue gap via borrowings of up to R70 billion, of which up to half may utilize government guarantees. Eskom still has to complete its board appointments and appoint a permanent CEO. Broader reforms to state-owned enterprises are still being discussed and the ratings agency does not foresee implementation in the near term.

According to the World Bank Treasury, sovereign credit guarantees to state related entities can help catalyze private sector investments and fulfill desirable policy objectives. On-lending can channel resources from government borrowing to specific entities and desired projects. Guarantees, however, also create contingent liabilities and the on-lending of proceeds from government borrowing creates contingent assets, i.e. the government assumes the risk of the beneficiary’s inability or unwillingness to repay.

Prudent risk management can help mitigate these fiscal risks. Managing fiscal risks should be embedded in a holistic risk management framework, including various aspects such as the definition of objectives for risk management, risk analysis, the development of a risk management strategy, as well as implementation and monitoring of the strategy. Guarantees and on-lending by government can help meet policy and development objectives but also create fiscal risks. To manage these risks, government should design holistic risk management frameworks that include the analysis and measurement of risks. To set up a risk measurement process, risk managers should first clarify the specific situation of their respective exposure, and then conduct a thorough risk analysis which can be translated into quantified measures. The results of risk analysis and measurement can be used to inform various risk management tools designed to mitigate governments’ fiscal risks.

7. KEY FINDINGS

7.1       Technical Issues

In the Department’s annual report, the Director-General states the following:

• All information and amounts disclosed throughout the annual report are consistent.
• The annual report has been prepared in accordance with Guidelines on Annual Report by National Treasury.
• The Annual Financial Statements (AFS) have been prepared in accordance with modified strands and relevant frameworks and guidelines issued by the National Treasury.
• There are systems of internal control established and implemented to provide reasonable assurance to the integrity and reliability of the performance information, human resources and AFS.

7.2       Governance and Operational Issues

Currently most SOCs have vacancies in key executive management positions in place. There are acting Group Chief Executives in SOCs such as, Alexkor, Denel, Eskom, and Safcol. Eskom had problems at the board level. Currently Eskom has an Interim Chairperson. These positions should be filled so that there is stability in the SOCs. Governance remains a key concern in most SOCs. A telling example is the failure of South African Express in meeting reporting deadlines. 

The Department should develop and issue an ownership policy framework that defines the overall objectives of state ownership. The Department should set up reporting systems allowing regular monitoring and assessment of SOC performance.

The Committee is looking into governance, procurement and financial viability of Denel, Eskom and Transnet as part of its oversight mechanism. This should have been avoided if the Department had strategies, systems and process in place to discharge its mandate. Within the Department there were weaknesses in detecting corporate governance challenges faced by these SOCs.

The Committee is concerned that the Department has not shown sufficient leadership and that it does not have appropriate checks and balances in place to monitor the SOCs sufficiently.  The Committee also raised that concern that the Department and the Minister as the only shareholder in these SOCs do not have enough power over the SOCs to maintain proper governance.  The Committee therefore finds it imperative for the Shareholder Management Bill to be fast-tracked and presented to Parliament by the end of March 2018.  This will allow the Committee to address the strengthening of the Department’s and Ministry’s oversight and monitoring function.

As stated above, the allegations against Eskom, Denel and Transnet will be investigated by the Committee during the inquiry into governance of these SOCs.  The Committee will address these issues as it is aware of the negative impact these allegations has on the fiscus of the country, economy and population at large.

8. Summary of reporting requests

The Auditor-General reported that the Department’s achieved a clean audit with no findings. Therefore, there are no reporting requests relating to the Department.

9. Recommendations

1. The Committee recommends that the Minister of Public Enterprises should:

1. Ensure the capacitation of the internal audit function in the Department and state-owned companies to ensure improvements in basic record keeping, strengthening internal controls and compliance with the legislative framework.
2. Together with the Department of Planning, Monitoring and Evaluation, develop mechanisms for appropriate sanctions to discourage poor performance, especially in ensuring that the attainment of targets in the annual performance plans are aligned to budget planning and spending performance.  The Department should also ensure that there are punitive measures in place for under-performance against targets for board members, executives, contractors of SOCs and officials of the department.
3. Ensure that all critical, funded and vacant posts are filled timeously.
4. Immediately strengthen and improve the oversight effectiveness over public entities with emphasis on the following:

• Appropriate and effective planning and budgeting processes are put in place;
• The financial management and control structures and processes are such that accurate, timeous and reliable recording and reporting of all financial transactions takes place; 
• That the appropriate financial management systems and controls are in place to ensure the effective management of the financial affairs of the entity; 
• That the financial affairs and performance of the entities as reported is acceptable in terms of the corporate plans and shareholder compacts;
• Significantly enhance reporting and accountability arrangements that facilitate an appropriate oversight by the Department; and
• Urgently develop technical capacity within the Department to oversee its public entities.
  1.             Ensure that all State Owned Entities develop and set explicit targets and submit quarterly reports to the Committee on:

• their cost containment programme, working capital management, infrastructure investment programme, procurement management strategy and effectiveness; and
• programmes for supporting SMMEs inclusive of clear targets and rand values and their business efficiency programme. 
  1. Address concerns raised by the ratings agencies on Eskom’s future funding gaps and utilization of government guarantees.
  2. Assist with the timeous resolution of land claims in conjunction with the Department of Rural Development and Land Reform, and ensure a sustainable future role for Safcol.
  3. Create black industrialists and local industries through SOCs.
  4. Increase and strengthen oversight over state-owned companies through robust and regular interaction with CEOs, Board Members, Audit Committees, regular visits to the construction sites of major infrastructure projects as well as to offices and sites of the entities.
  5. Fast-track the introduction of the Shareholder Management Bill which will empower the department to carry out its oversight responsibilities over SOCs more effectively, especially in providing guidance on how to align SOCs’ strategic priorities with government policies.  The Department should present the draft Bill to the Committee by the end of March 2018.
  6. Provide the Committee with shareholder compacts signed with SOCs in order to enhance the oversight role of the Committee, within one month after the signing of the agreement.
  7. Institutionalise the recommendations of the Presidential Review Committee on SOCs and implement the Inter-Ministerial Committee, headed by the Deputy President, looking into the SOCs and the Department.
  8. Ensure that all the SOCs undertake interim audits, as most of them received qualified audit opinions with findings.
  9. Ensure that the Department closely monitors South African Express Airways in the implementation of the turnaround strategy.
  10. Ensure that the Department finalises the future strategic roles for Alexkor and Safcol timeously.
  11. Pursue the finalisation of the Whole of State policy to bring alignment and synergy among state aviation assets, i.e. SAA, SAX and Mango, together with the National Treasury.
  12. Address issues relating to SOCs with going concern issues.
  13. Provide the Committee with quarterly progress reports regarding the implementation of these recommendations.
  14. Ensure that the Department submits a report to the Committee on its failure to fill vacancies, especially at management level, and what is being done to address this.  This report needs to be submitted within three months after the adoption of this report by the National Assembly.
  15. Ensure that the Department submits a report to the Committee on governance gaps with the SOCs, including governance structures, within three months after the adoption of this report by the National Assembly.
  16. Ensure that the Department submits a report to the Committee on compliance by the SOCs with the procurement localisation strategy adopted by government of 75% local procurement.  This report should be submitted to the Committee within three months after the adoption of this report by the National Assembly.
  17. Ensure that Transnet submits, through the Department, a report of how the R8 billion expenditure programme in the Port of Saldanha Bay will be spent, including timelines.  This report should be submitted within three months after the adoption of this report by the National Assembly.
  18. Ensure that the Department submits an assessment on the ownership of SAX aircraft and how this will affect possible aircraft leases should the Whole of State aviation strategy be approved. 
  19. Ensure that the Department provides a written response to the Committee on the above recommendations and the progress thereon within three months after the adoption of this report by the National Assembly.

1. The Committee recommends that the Minister of Finance should:

9.2.1    Ensure that the nuclear procurement plan to be undertaken by Eskom should not be pursued at the expense of the financial viability and sustainability of Eskom and of the country.

9.2.2    Ensure that a strategy to reduce SOCs’ reliance on government guarantees is adopted.

9.2.3    Ensure mechanisms for oversight by over SOCs’ regulatory agencies.

9.2.4    Together with the department of Public Enterprises, finalise the aviation Whole of State policy and ensure implementation thereof as soon as possible.

9.2.5    Together with the Department of Public Enterprises, address the concerns regarding going concern issues pertaining to SOCs.

9.2.6    Provide a written response to the Committee on the above recommendations and the progress thereon within three months after the adoption of this report by the National Assembly.

1.   Recommendations that were not implemented from the previous financial years

9.3.1    Provide the Committee with shareholder compacts signed with state-owned   companies in order to enhance the oversight role of the Committee, within one month after the signing of the agreement.

9.3.2    Provide the Committee with shareholder compacts signed with state-owned companies in order to enhance the oversight role of the Committee, within one month after the signing of the agreement.

9.3.3    Institutionalise the recommendations of the Presidential Review Committee on SOCs and implement the Inter-Ministerial Committee, headed by the Deputy President, looking into the SOC’s and the Department.

9.3.4   Fast-track the introduction of the Shareholder Management Bill which will empower the department to carry out its oversight responsibilities over State-Owned Companies more effectively, especially in providing guidance on how to align SOCs’ strategic priorities with government policies. 

The Minister of Public Enterprises should furnish the Committee with a progress report on

the implementation of these recommendations by 31 March 2018. The Committee views the timeous responses to Committee recommendations as important for ensuring accountability and transparency. More importantly, it allows for oversight to work together with the Executive in finding solutions to the challenges facing our country.  

10.      

The Committee would like to express its gratitude to the management of the Department of Public Enterprises, the Office of the Auditor-General, State-Owned Companies reporting to the Department of Public Enterprises and the parliamentary officials supporting the Committee for their hard work and co-operation during this process.

Report to be considered.

[1] Department of Public Enterprises (2017)

[2] Ibid

[3] Department of Public Enterprises (2017)

[4] Auditor-General of South Africa (2017)

[5] Department of Public Enterprises (2017)

[6] Auditor-General of South Africa (2017)

[7] Department of Public Enterprises (2017)

[8] Auditor-General of South Africa (2017)

[9] Eskom (2017)

[10] Transnet (2017)

[11] Ibid

[12] Ibid

[13] SA Express (2017)

[14] Ibid.

[15] National Treasury (2017b)

[16] National Treasury (2017b)

[17] National Treasury (2017b)