Public Enterprises2019BRR

1. Budgetary Review and Recommendation Report of the Portfolio Committee on Public Enterprises, dated 16 October 2019

The Portfolio Committee on Public Enterprises (hereinafter referred to as the Committee), having considered the performance of the Department of Public Enterprises for the 2018/19 financial year, reports as follows:

1. Introduction
2. 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.

The mandate of the Committee is to consider legislation referred to it; exercise oversight over the Department and the seven 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.

The Department of Public Enterprises is the shareholder representative for government on 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 (NGP) and the Industrial Policy Action Plan (IPAP). 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 of these objectives. It is within this context that the BRR concerning the Department of Public Enterprises by the Portfolio Committee on Public Enterprises is presented. 

This report is a culmination of 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 and a briefing from the Office of the Auditor-General of South Africa (AGSA) on the audit outcomes of the Department and its entities on 8 October 2019, 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.

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 recommendations.

2. OVERVIEW OF THE POLICY ENVIRONMENT

The World Bank report states that reducing poverty and inequality is the overriding concern of South Africa’s development policies and programs, from the onset of our democracy in 1994 in the Reconstruction and Development Programme (RDP) to the current National Development Plan: Vision 2030 (NDP). The guiding principle, as captured in the NDP, is that “no political democracy can survive and flourish if the mass of our people remain in poverty, without land, without tangible prospects for a better life. Attacking poverty and deprivation must be the first priority of a democratic government”. The NDP posits that to raise the living standards to the minimum required level will involve various mechanisms, such as increasing employment, incomes, productivity as well as through social protection and quality public services. The measure of success of government’s development policies will be when the lives and opportunities of poorest South Africans are transformed for the better. Government is committed to eliminating poverty, and fiscal policy is one critical lever that expresses this commitment.

The President in his State of the Nation Address 2019 outlined that, “we need to focus on those actions that will have the greatest impact, actions that will catalyse faster movement forward, both in the immediate term and over the next 10 years”. He noted that, the Medium-Term Strategic Framework for the last five years had more than 1 100 indicators by which government had to measure progress in the implementation of the NDP. In his addressed the President emphasised the need to focus on implementation and making unpopular choices in an environment constrained by limited public finances.

The President outlined the seven priorities for the sixth administration as follows:

• Economic transformation and job creation.
• Education, skills and health.
• Consolidating the social wage through reliable and quality basic services.
• Spatial integration, human settlements and local government.
• Social cohesion and safe communities.
• Building a capable, ethical and developmental State, and
• A better Africa and world.

The President further emphasised the need to ensure that the State is able to effectively enable economic and social development, he further outlined that it is essential that government strengthen State-Owned Enterprises (SOEs). Through the Presidential SOE Council, government intends to create alignment between all state-owned companies and to better define their respective mandates. Government will work with the leadership of SOEs to develop a legal and regulatory environment that promotes innovation and agility and enhances their competitiveness. Government will further build on the work to address problems of poor governance, inefficiency and financial sustainability. The President instructed Directors-General during the Forum of South African Directors-General (FOSAD) to re-engineer government implementation and delivery models in order to enhance efficiency, transparency and accountability in the use of resources.

Subsequent to the State of Nation Address by the President, the Minister of Finance in his Budget Speech 2019, outlined the following six fundamental prescripts to constructing his budget:

1. Achieving higher economic growth.
2. Increasing tax collection.
3. Reasonable, affordable expenditure.
4. Stabilising and reducing debt.
5. Reconfiguring state-owned enterprises.
6. Managing the public wage sector wage bill.

The Minister of Finance stated that government will be reviewing its framework for state-owned enterprises support. Government has revised its contingency reserve upwards to R13 billion for 2019/20 to requests for financial support. During this past financial year, total guarantee utilisation by R51.1 billion. The Minister of Finance outlined that government must tighten guarantee rules. He further stated that Cabinet is considering a proposal to guarantees for operational purposes. Expiration dates on guarantees will be enforced. The Minister of Finance reemphasised the announcement made by the President for a persuasion of strategic equity partners where possible.

The South African Reserve Bank outlines in monetary policy review that South Africa’s economy faces two large macroeconomic risks. The first is global, a slowdown in trade growth that could precipitate a global recession. The second is domestic, a deteriorating fiscal situation linked to bailouts for state-owned enterprises. Both could worsen an already difficult domestic growth situation. The economy’s potential growth rate has slumped to around 1% in the context of supply constraints (especially electricity shortages) and depressed business confidence. Demand has also weakened, in the face of higher taxes and slowing wage growth, among other factors. Inflation outcomes have been better, close to the midpoint of the 3–6% target range, which has given policymakers some space to reduce rates. Looking forward, the policy stance aims to provide support to a weak economy while ensuring inflation remains securely within the target range across the forecast period, despite risks.

State owned companies are critical in the economic growth and development of the country. Their current financial state occurs to impose risk to the economy. Institutional investors are calling for structural changes in the SOC environment to ensure that there are minimal risks associated with security of capital. State owned companies’ operational context should be improved in line with policy pronouncement to achieve economy, efficiency and effectiveness. The Committee will continue to provide oversight on governance, financial sustainability and procurement in SOCs in line with the recommendations made during the Parliamentary inquiry on SOCs. Furthermore, the Committee will further interact with issues emanating from the state capture commission led by Deputy Chief Justice Zondo which have an impact on the SOCs. The Committee is committed to addressing stakeholder concerns, restoring the public trust and ensuring improvements in restoring the reputation of state owned companies.

2.1 Key Policy Focus for the Department of Public Enterprises

The Department of Public Enterprises oversees seven State-Owned Companies: Alexkor, Denel, the South African Forestry Company, Eskom, South African Airways, South African Express Airways and Transnet. These companies are key drivers of economic growth and development in the economy. The Minister of Public Enterprises outlined the new focus for the department in response to the challenges faced by the SOCs. There is an opportunity to develop the department into a modern ethical and effective representative of government as a shareholder of SOEs.  The Minister emphasised the need to develop the department into a centre of government excellence where the best experts and skills in the various sectors in which SOEs operate. The department needs to adopt new approach to the Department in order to fulfil its oversight function. The proposed approach will focus:

1. Governance and accountability:

• Boards must be increasingly accountable for the financial and operational performance and repositioning of SOEs.
  • This new approach will necessitate that the department revisit all the instruments of SOE oversight:
    • Strategic intent statement;
    • Shareholder compacts;
    • Memorandum of incorporation; and
    • SOE performance appraisal system

1. Positive impact on the economy:
   • Increasing investment in the economy
   • Crowding in private sector investment:
     • Reducing the cost in doing business and cosy of living by reducing logistic costs and tariffs and promoting the growth of manufacturing linked to local procurement and localisation
     • Creating business, medium and small enterprises
     • Skills development​

3. Looking into the future Boards will be asked to:

• Review the current business model and developing models appropriate to the conditions.
• Develop financial sustainability plans to ensure that SOEs are financially self-reliant.

3. SUMMARY OF PREVIOUS YEAR BRRR Recommendations MADE BY THE COMMITTEE

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 institute audit and risk committees in boards in line with the provisions of the Public Management Finance Act.
   2. Provide the Committee with shareholder compacts signed with SOCs in order to enhance the oversight role of the Committee. Shareholder compacts should be submitted within one month after the signing of the agreement.
   3. Ensure that the board comply with the Public Management Finance Act, the SOC mandate and all other applicable legislation.
   4. Present to the Committee the strategic objectives in line with the shareholder compacts to manage the delivery of board committees through appropriate and measurable Key Performance Indicators (KPIs) for board and executive management.
   5. Together with the Department of Planning, Monitoring and Evaluation, develop mechanisms for appropriate sanctions to discourage poor performance, ensure that the attainment of targets in the annual performance plans are aligned to budget planning and spending performance. 
   6. Institute timely consequences for executives and management who deliberately or negligently ignore their duties and contravene legislation. A list of action taken against transgressors must be provided quarterly to the Committee for follow up of all irregular, fruitless and wasteful expenditure.
   7. Provide ethical leadership in boards and ensure appropriate sanction for breaches and transgressions in SOCs.
   8. Present to the Committee a strategy to address the going concern matters reported by the Auditor-General on Denel, South African Airways and South African Express before the end of the financial year.
   9. 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 2019.
   10. Assist with the timeous resolution of land claims in conjunction with the Department of Rural Development and Land Reform, and ensure a sustainable role for SAFCOL.
   11. Ensure that all critical, funded and vacant posts in the Department are filled to avoid underspending before the end of March 2019.
   12. Present to the Committee a plan to address leadership stability and filling of key positions in SOCs in the department’s quarterly report.
   13. Present the Committee with a funding plan, cost optimisation and revenue maximisation strategy for Eskom before the end of the financial year.
   14. Present the Committee with a transparent electricity tariff determination and its impact on consumers before the end of the financial year.
   15. Present to the Committee a strategy on optimisation of energy mix in line with the Integrated Resource Plan 2018.
   16. Provide clarity to the Committee on the pronouncements on increase in strategic equity partnerships from private sector and restructuring plans of SOCs.
   17. Present to the Committee policies to mitigate potential conflicts:

• Conflicts of interest policy which defines what conflicts are for that SOC and how these are managed, disclosed and reported.
• Political Exposed Person (PEP) policy defines what a PEP is and how transactions with PEPs are managed, reported and disclosed.
• A ‘cooling-off’ policy for outgoing directors and executives of SOCs must be developed.
• A policy which details the delegation of authority limits. This should specify an appropriate Rand amount of deals/transactions that certain individuals and committees can approve.
• A contentious issue policy that describes the management and escalation of contentious matters.
  1. Immediately strengthen and improve the department’s oversight effectiveness over its SOCs 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.
• That the financial affairs and performance 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 SOCs.
  1. Provide the Committee with reasons and actions taken for non-submission and tabling of SOCs (Denel, SAFCOL, SAA and SAX) Annual Reports to Parliament.
  2. Provide the Committee on the implementation of all recommendations by the Auditor-General on SOCs.
  3. Provide the Committee with quarterly progress reports regarding the implementation of these recommendations.
  4. Provide the Committee with a report on implementation of oversight inquiry recommendations on Eskom relevant to the Department and other parties.
• The Committee recommends that the Minister of Finance should:

1. Utilize his vested power to hold the shareholder representatives and others in the SOCs to account on financial management as articulated in the Public Finance Management Act.
2. Assist the department to identify business and environmental risks associated with SOCs. 
3. Assist government through mechanisms to reduce risks associated with wholesale funding and limit exposure of SOCs. The new Financial Sector Regulation Act lays the foundation of the Twin Peaks model of financial regulation and confers on the South African Reserve Bank (SARB) an explicit statutory mandate to enhance and protect financial stability.
4. Introduce a transparent framework in terms of how to run SOCs commercially, and compensate them for any development mandate expenditure through budget transfers.
5. Enhance fiscal policy to create buffers against shocks through the development of a framework with threshold levels on the minimisation or avoidance of risky contingent liabilities.
6. Provide leadership on revenue enhancement in SOCs with regards to the review of pricing models, selling non-productive assets, and collecting arrears.
7. Ensure the capacitation of the internal audit function in the Department and State-Owned Companies to improve record keeping, strengthen internal controls and compliance with the legislative framework.
8. Together with the Department of Planning, Monitoring and Evaluation (DPME), develop mechanisms for appropriate sanctions to discourage poor performance, particularly in the attainment of annual performance plan targets, 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.
9. Ensure that all critical, funded and vacant posts are filled timeously.
10. Immediately strengthen and improve the Department’s oversight effectiveness over its public entities with emphasis on the following:

• Appropriate effective planning and budgeting processes are put in place;
• The financial management, control structures and processes are such that accurate, timeous, reliable recording and reporting of all financial transactions takes place; 
• That the appropriate financial management systems and controls are in place to ensure 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 all State Owned Entities develop, 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, 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, Mango and SAX, 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.

4. Overview and assessment of financial performance

The Department of Public Enterprises spent 99.3 per cent of its budget in the 2018/19 financial year and received an unqualified audit opinion with no findings.

Table 1. Overview of Vote allocation and spending (2014/15 to 2018/19) R’million

Source: Department of Public Enterprises (2019)

As shown in the table above, in the previous four years the DPE underspent by more than 5 per cent for three of those years.  The reason given for the underspending in the 2014/15 financial year was mainly due to delays in filling vacant posts and delays in projects that have not yet commenced and other projects that still need to be completed.  The under-expenditure of R16.3 million in the 2017/18 financial year was also due to vacancies which were as a result of the realignment of the organisational structure.[1]

The Department was allocated R293 million at the beginning of the 2018/19 financial year.  The budget allocation was adjusted upward during the Adjusted Budget Appropriation in October 2018 by R6.249 billion.  R5 billion was appropriated in the Special Appropriation Bill, 2018 for the recapitalisation of South African Airways to settle debts due, while R1.249 billion was allocated for the South African Express Airways.  Of the allocated budget of R6.523 billion, R6.475 billion was spent, resulting in an amount of R48.1 million or 0.7 per cent not being spent.  The unspent balance of R48.1 million will be surrendered to the National Revenue Fund (NRF).[2] 

1. Financial performance 2018/19

During the 2018/19 financial year, the Department spent its 2018/19 budget in the following manner:

Table 2. Quarterly Expenditure for the 2018/19 financial year

Source: National Treasury (2018-2019) SCOA Reports

As seen in table 2 above, in the first quarter, April to June 2018, the Department spent
R49.3 million or 18.0 per cent of the R273.9 million budget Appropriated for the 2018/19 financial year.  The Department spent 24.5 per cent less than the R65.4 million it projected to spend. The slower than projected spending is a result of vacancies that were put on hold due to a departmental realignment process as well as delays in the commencement of some of the projects.[3]

The majority of the Department’s budget is spent on Compensation of employees and Goods and services.  Of the R171.4 million budgeted for compensation of employees, R32.4 million or 18.9 per cent has been spent.  An amount of R99.4 million has been allocated for Goods and services, where R15.2 million or 15.3 per cent was spent in the first quarter. 

On Compensation of employees, the Department has underspent by R10.2 million from a projected amount of R42.6 million.  As at 30 June 2018, the Department had a headcount of 173, which translates to a vacancy rate of 25.1 per cent.  National Treasury notes that the Department intended to implement a new organisational structure from April 2018.  However, implementation was put on hold following a change in leadership prior to the beginning of the new financial year. 

By the end of the second quarter, April to September 2018, the Department spent
R101.8 million or 37.2 per cent of the Appropriated Budget of R273.9 million, which represents a decrease of R13 million compared to the second quarter in the previous financial year.  An amount of R59.3 million or 39.0 per cent of its budget was spent under Administration programme mainly on Compensation of employees and Goods and services.  Programme 3: Business Enhancement, Transformation and Industrialisation programme spent R26.4 million, while Programme 2: SOCs Governance Assurance and Performance spent R16.2 million.  Both programmes primarily spent on Compensation of employees and Goods and services.  The Department was again slow in spending on Compensation of employees as the vacancy rate remained high due to the filling of vacant posts that was put on hold pending the finalisation of the organisational realignment process.[4] Spending on goods and services was also slow due to delays in the commencement of projects. 

The Department was allocated R293 million at the beginning of the 2018/19 financial year.  The budget allocation was adjusted upward during the Adjusted Budget Appropriation in October 2018 by R6.249 billion.  R5 billion was appropriated in the Special Appropriation Bill, 2018 for the recapitalisation of South African Airways to settle debts due, while R1.249 billion was allocated for the South African Express Airways.  Virements amounting to R1.8 million mostly from goods and services, which were shifted to Payments for capital assets for machinery and equipment. 

With an available budget of R6 522.9 million, the Department spent R159.2 million or 2.4 per cent by the end of the third quarter of 2018/19.  The bulk of this amount was spent on Compensation of employees and goods and services.  The Administration programme spent 62.9 per cent of its budget by the third quarter of the 2018/19 financial year amounting to R95.6 million, mostly on Compensation of employees and Goods and services.  Actual expenditure to the end of December 2018 for Programme 2: SOC Governance Assurance and Performance amounted to R23.6 million of the available budget of R39.1 million or 60.4 per cent of the budget has been spent.  Spending was lower than projected by R1.7 million or 6.6 per cent mainly on Goods and services, owing to delays in the commencement of some projects.  The Business Enhancement, Transformation and Industrialisation programme had an adjusted budget of R6 331.9 million and had spent R40.0 million or 0.6 per cent by the end of December 2018. The low spend is due to the adjusted amount of R6.2 billion received during the medium term budget policy period.

By the end of the third quarter, actual expenditure was slower than projected.  This was mainly due to lower than projected spending on Compensation of employees due to delays in filling vacant posts as well as slow spending on Goods and services due to projects that have been delayed.  Compensation of employees amounted to R109.4 million against a budget of  R171.4 million or 63.8 per cent, while Goods and services amounted to R41.7 million or 42.8 per cent against a budget of R97.5 million.[5]

The Department spent R6.475 billion of the allocated budget of R6.523 billion, resulting in an amount of R48.1 million or 0.7 per cent not spent.  The unspent balance of R48.1 million will be surrendered to the National Revenue Fund (NRF).[6]  The underspending of R48.1 million was mainly due to underspending on Compensation of employees of R26.9 million due to the suspension of vacant posts pending the organisational realignment.  Underspending on goods and services of R21.1 million was a result of delays in the commencement of some of the projects.[7] 

During the Adjustment Budget the Department effected shifts and virements amounting to R1.8 million.  Programme 1 shifted funds within the programme from Goods and services amounting to R1.8 million to Transfers and subsidies of R345 000 for households for employee social benefits and the Payment of capital assets of R1.5 million for machinery and equipment.  Programme 3 shifted funds within the programme from goods and services, consumable supplies of R22 000 to Transfers and Subsidies for households for employee social benefits.[8]  The Department has not requested any roll-over of funds from the 2018/19 financial year to the current financial year.

The Department has received an unqualified audit opinion with no findings in the 2018/19 financial year, similar to the previous year’s audit opinion.[9] 

4.1 Auditor-General Report

The Department received an unqualified audit with no findings.

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 deteriorated in the period under review, with some entities unable to satisfy the going concern criteria, which prevented the entities from submitting their annual report to Parliament by 30 September 2019. 

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 the financial performance.

4.2.1    Alexkor

During the 2017/18 financial year, revenue declined by 46 per cent year-on-year as a result of a decrease in carat production due to a decrease in boat days. This was caused by unfavourable weather conditions affecting mid and deep-sea mining and a lack of production from International Mining and Dredging South Africa (Pty) Ltd (IMDSA). This was further exacerbated by the vessel that caught fire in April 2017 and the resultant cash flow operational shortage.  The EBITDA (earnings before interest, tax, depreciation and amortisation) margin was not met due to the lower production. 

The entity once again received an unqualified opinion for the 2017/18 financial year, with findings on its predetermined objectives, on compliance with legislation as well as internal control deficiencies. 

The entity was unable to submit its 2018/19 annual report to Parliament by 30 September 2019 as it could not satisfy the criteria of a going concern.  Thus, the auditors could not sign off the entity’s annual report.  The Minister of Public Enterprises submitted a letter to Parliament on 27 September 2019 advising of the late submission of the entity’s 2018/19 annual report.

4.2.2    Denel

During the 2016/17 financial year, the entity received an unqualified opinion with findings on its compliance with laws and regulations.[10]

In a meeting with the Portfolio Committee on 06 February 2018, Denel advised the Committee that it was facing liquidity concerns over its indebtedness. Their operating cash was not adequate, and they had R350 million overdue to unpaid suppliers.  The entity’s work was on hold as suppliers were not delivering due to outstanding payments.  The number of incidents of irregular expenditure has also increased.  Denel also advised the Committee that its financial statements and annual report for 2017/18 would be delayed.

On the 18 September 2018, the Minister of Public Enterprises advised Parliament that Denel would not be tabling their annual report and the annual financial statements by 30 September 2018 as required by the Public Finance Management Act (PFMA).  The Minister did not stipulate the length of the expected delay.

Although Denel submitted its annual report for the financial year 2018/19, it received a disclaimer of opinion as the audit was not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on the financial statements.[11]

4.2.3    SAFCOL

On the 28 September 2018, the Minister of Public Enterprises advised Parliament that SAFCOL would not be tabling their annual report and the annual financial statements by 30 September 2018 as required by the PFMA. 

The South African Forestry Company (SAFCOL) submitted the 2017/18 annual report, the entity had received a qualified opinion based on numerous issues stemming from the fact that no appropriate evidence or supporting documents was available.  The entity achieved 53.6 per cent of its performance targets, although the auditors found fault with three of the strategic objectives, revenue declined by 8.6 per cent year-on-year, and the operating loss increased to R136.2 million. The entity was also not prepared to implement the Preferential Procurement Regulations that came into effect on 01 April 2017, which affected its operations negatively. Overall, SAFCOL’s performance for the 2017/18 financial year was not successful.

The Minister appointed a new board in October 2018 and tasked them with implementing a turnaround strategy for the entity. In his 2019 budget vote speech, the Minister of Public Enterprises, Mr. Pravin Gordhan, stated that boards will be asked to review current business models and develop models appropriate to the conditions. Further to this, they will need to develop financial sustainability plans to ensure that SOEs are financially self-reliant.[12]

Despite the above developments for the entity, SAFCOL still received a qualified audit opinion for the 2018/19 financial year.  The qualification was due to irregular expenditure of R129.4 million incurred during the year.[13] 

4.2.4    Eskom

In the previous financial year 2017/18, Eskom once again received a qualified audit opinion based on the fact that Eskom could not adequately identify and recognise all irregular expenditure.Once again the auditors could not determine whether any adjustment was necessary to the balance of irregular expenditure stated at R19.6 billion in the financial statements.

Eskom again received a qualified audit opinion based on the same reason as in the prior year, it could not adequately identify and recognise all irregular expenditure.[14]Yet again the auditors could not determine whether any adjustment was necessary to the balance of irregular expenditure as well as the fruitless and wasteful expenditure in the financial statements.Further, material uncertainty exists that may cast significant doubt on the group’s ability to continue as a going concern.

Due to the entity’s importance to the country as the electricity generator, Eskom is receiving government support of R23 billion per year over the next years for the reconfiguring of the entity, totalling R69 billion.Additional funding of R59 billion is also being requested through the Special Appropriation Act, 2019 of which R26 billion would be transferred during the 2019/20 financial year and R33 billion would be transferred during the 2020/21.Further, Eskom has a R350 billion government guarantee of which R279 billion has been utilised,
R52 million has been committed but not yet utilised, leaving R19 billion available for utilisation.

4.2.5    Transnet

During the 2017/18 financial year, the entity received a qualified audit opinion as the auditors were unable to obtain sufficient audit evidence that irregular expenditure was complete and accurate.Irregular expenditure was stated at R8.1 billion.Transnet also received findings relating to their predetermined objectives and on compliance with laws and regulations, while internal control deficiencies were also identified.

Transnet once again received a qualified audit opinion for the 2018/19 financial year, based on the same reason as given in the previous financial year.The Auditors were unable to obtain sufficient audit evidence that irregular expenditure was complete and accurate.[15]  Irregular expenditure was stated at R41.5 billion.Due to the qualified audit, there is also material uncertainty related to its status as a going concern as loans and facilities available to Transnet, may potentially be breached as a result of the qualified audit opinion.The impact on Transnet resulting from the possibility of loans and facilities that become due and payable could have a significant impact on Transnet’s availability to sufficient resources and facilities for the entity to meet its obligations in the ordinary course of business.Transnet, yet again received findings relating to their predetermined objectives, on compliance with laws and regulations as well as on internal control deficiencies.

4.2.6    South African Express Airways

On 29 August 2019, the entity presented its turnaround strategy to the Committee.  In its presentation, the entity stated that it planned for a recovery of aircraft to ensure a stable schedule at all times.  However, due to delayed funding it was unable to set aside such aircraft. The lack of funding has led to frozen credit lines with suppliers and Freight Forwarder insisting on cash upfront before services are given.  Given, the unavailability of aircraft the entity has made a loss of R119 million by June 2019, unaudited figures.  The airline is currently operating 12 routes from August to June 2019.  Government approved an amount of R1.2 billion during the 2018/19 Adjusted budget in aid of the airline paying debt. The airline is requesting further government support.

The entity was unable to table is annual report to Parliament by 30 September 2019.  The Minister of Public Enterprises submitted a letter to Parliament on 27 September 2019 advising Parliament that the entity would be tabling its 2018/19 annual report late.

4.2.7    South African Airways

On 19 December 2014, the President had transferred the administration of the South African Airways Act, 2007 from the Minister of Public Enterprises to the Minister of Finance due to the airlines liquidity issues. 

The President transferred the administration of the South African Airways Act, and its accompanying functions, from the Minister of Finance back to the Minister of Public Enterprises.  A proclamation to this effect was gazetted on 01 August 2018.  This will enable the Minister to develop the optimal group structure for the state-owned aviation assets.[16]

The airline is also facing going concern challenges.  As stated above, the government recapitalised the airline with R5 billion during the 2018/19 financial year, with a further
R5.5 billion approved for the 2019/20 financial year.  The R5.5 billion was expected to be transferred to the entity by 30 September 2019.

On the 27 September 2019, the Minister of Public Enterprises advised Parliament that SAA would not be tabling their annual report and the annual financial statements by 30 September 2019 as required by the PFMA.  The Minister did not stipulate the length of the expected delay.

4.3 Department of Public Enterprises’ financial performance for 2019/20

The Department has an appropriated total budget of R293.0 million of which
R53.8 million or 18.3 per cent has been spent for the period April to June 2019.[17]  This is lower than the projected expenditure by 27.4 per cent for the first quarter.  This compares favourably on the R49.3 million or 18.0 per cent 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 R184.5 million budgeted for Compensation of employees, R40.4 million or 21.9 per cent has been spent.  An amount of R105.2 million has been allocated for Goods and services, where R12.7 million or 12.1 per cent was spent in the first quarter.  On Goods and services, the Department has underspent by R14.6 million from a projected amount of R27.2 million. 

The majority of the budget was spent on the programme Administration.  The programme has an appropriated budget of R164.9 million (56.3 per cent of the total budget), of which
R33.0 million or 20.0 per cent has been spent by the first quarter.  The low spending was due to delays in the commencement of some of the projects as well as vacant posts.

Programme 2: State-Owned Companies Governance Assurance and Performance has a budget of R43.9 million of which R8.3 million or 18.8 per cent of the budget was spent.  The main cost driver within the programme were Compensation of employees, and Travel and subsistence. 

Programme 3: Business Enhancement, Transformation and Industrialisation has a budget of R84.2 million of which R12.5 million or 14.8 per cent of the budget was spent by the end of June 2019.  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 2019, the Department had a headcount of 173, which translates to a vacancy rate of 25.4 per cent.  Spending on compensation of employees was R5.4 million or 21.9 per cent less than projected.  The underspending is due to unfilled posts in line with delays in the implementation of the new organisational structure.

This section looks at the medium term expenditure framework (MTEF) for the 2020/21 financial year.

Table 3. Current Estimates for the 2020/21 R’million

Source: National Treasury (2019)

Table 3 illustrates the projected allocation for the 2020/21 financial year amounts to
R312.8 million, a R19.8 million or 6.8 per cent increase.  Programme 2: State-Owned Companies Governance Assurance and Performance will realise the biggest increase of
7.3 per cent from R43.9 million in 2019/20 to R47.1 million in 2020/21. Programme 1: Administration and Programme 3: Business Enhancement, Transformation and Industrialisation will both increase by 6.7 per cent.

This allocation is subject to confirmation and approval by the Minister of Finance during the National Budget in February 2020.

The Department has requested additional funds for the capital injection of R13.2 billion,
R1.087 billion and R1 billion in respect of South African Airways (SAA), South African Express Airways (SA Express), and Denel.  The details are as follows:[18]

4.4.1. South African Airways

In terms of funding received from Government, in 2017/18 SAA received a recapitalisation of R10 billion which enabled the entity to settle some of its long term debt. SAA further received R5 billion recapitalisation in the 2018/19 financial year for the repayment of the short term bank bridge facility loan in November 2018. Despite Government providing these capital injections, the airline remains insolvent, with its liabilities exceeding its assets by R13 billion as at March 2019, and has a significant amount of outstanding debt and liabilities that it is unable to service.

Taking into consideration all challenges faced by the Airways without a recapitalisation the turnaround cannot succeed. The allocations recommended by the Department in this regard are as follows: 2020/21- R4.7 billion; 2021/22 - R4.5 billion; 2022/23 - R4 billion. 

An application has already been made by the Department on behalf of SAA for an allocation of funding out of the contingency reserve. The allocation of R4.7 billion proposed for 2020/21 would allow for the repayment of the R4 billion facility that SAA requires to meet its liquidity requirements in 2019/20 as well as small reduction of the R9.2 billion of existing debt.

4.4.2. South African Express Airways

Following its suspension of services by the South African Civil Aviation Authority (SACAA) on 24 May 2018, the airline requested an emergency equity injection of R2.336 billion. The emergency funding required was due to the fact that the airline did not have sufficient funding to continue with its operations. This was the case even prior to the suspension of services which later exacerbated by the grounding. SA Express was issued with an additional R1.74 billion guarantee in June 2018, bringing the total facility to R2.596 billion, of which SA Express utilised R400 million to secure a loan facility.  The recapitalisation of R1.249 billion announced at the Medium Term Budget Policy Statement (MTBPS) in October 2018 was transferred to the airline in January 2019.

The funding allocation, has restored SA Express to solvency: the airline had an equity balance of R386 million as at 30 April 2019 based on the management accounts. Prior to that all the equity has been eroded due to losses incurred over the years. However, as the funding was earmarked for the repayment of existing guaranteed debt, it did not improve the airline’s liquidity position. The airline has applied for R1.087 billion which is the balance of the R2.336 billion that it applied for in the 2018/19 Medium Term Budget Policy Statement. The allocations recommended by the Department in this regard are as follows:  2020/21 - R380 million; 2021/22 - R500 million; 2022/23 - R207 million.

4.4.3. Denel

Denel is experiencing severe liquidity and solvency challenges which are adversely affecting the company’s viability and putting the company’s existence at risk. Denel Management have reported that the SOC is currently technically insolvent. The unaudited financial results for the year ended 31 March 2019 show that the company has negative equity of R1 billion and a loss of R1.9 billion. Denel is unable to meet its financial obligations with debts to suppliers mounting and operations halted across divisions.

The Department has made a request for Denel to be granted a total equity injection of
R2.8 billion with R1.8 billion to be accessed through the contingency reserve that was announced by the Minister of Finance in the 2019 Budget Speech and the remaining R1 billion to be allocated in 2020/21.

The equity injection of R2.8 billion will ensure that Denel is returned to solvency, allowing it to operate more independently. The envisaged improved debt-to-equity position will allow the company to secure additional funding on the strength of its balance sheet to execute major contracts. A stronger balance sheet will enable the company to be sustainable and increase its order pipeline.

The Department is financially sound as exhibited by achieving unqualified audit opinions with no findings for the last three 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 suspension of filling posts pending the organisational realignment and the delayed commencement of certain projects. 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 of all its entities and engage on the best way for the entities to achieve financial sustainability.  Eskom’s finances have to be closely monitored to ensure that the money it is receiving from government is used to ensure the future sustainability of the company.  Implementation of the South African Airways and 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 confirmed with the continued stabilisation of their long-term planning.  Denel will have to overcome the disclaimer on its audit opinion and put the appropriate systems in place.  The Department is faced with entities that are facing financial instability and governance challenges.  The Department will have to strengthen its oversight and monitoring of these entities and engage National Treasury on ways to overcome the financial instability of these entities. 

The Department must provide the appropriate support to the SOCs to overcome the audit findings of 2018/19 in preparation for the 2019/20 financial audit.  Corrective measures and plans need to be put in place to address the audit findings.  The Department also needs to ensure that processes and procedures are put in place to address entities’ weaknesses timeously and effectively and efficiently before these issues escalate and become problems, which has been the case recently.

5. Overview and assessment of service delivery performance

5.1 Service Delivery Performance for 2017/18

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 (NGP) and the Industrial Policy Action Plan (IPAP). State-Owned Companies are crucial in driving the State’s strategic objectives of creating jobs, enhancing equity and transformation. The department’s contribution towards government priorities and outcomes is achieved through three programmes identified in the organisational structure namely: administration, state-owned companies’ governance assurance and performance and business enhancement, transformation and industrialisation. The section below discusses programme performance.

1.  Performance Information by Programme

1. Programme 1: Administration

a) Purpose

Provides strategic leadership management and support services to the department. The programme includes the Ministry, the Office of the Director-General and Support Services. The programmes currently comprises the following sub-programmes: Ministry; Management, Corporate Services; the Chief Financial Officer; Human Resources; Communications; Strategic Planning, Monitoring and Evaluation and Internal Audit.

b) Programme performance

The department reports notable achievements on the strategic objective on promotion of institutional alignment and efficiency across institutional model. In its report the department notes that the skills gaps were addressed through training interventions as identified in the training plan. The department remains committed to the development and upskilling of the existing workforce by implementing the Workplace Skills Plan (WSP). The department reported that it provided 22 training interventions during the year. Most of the skills interventions were aimed at Senior Management Services (SMS) in the department and others were implemented through Personal Development Plans (PDPs) emanating from employees’ performance contracts. The department has 50 bursary holders, nine of which are Master of Business Administration (MBA) candidates, five Master candidates and two PHD candidates.

The department reports that part of the Human Resource Plan (HRP) was to align the structure to enable the department to reach its strategic objectives as set out in the strategic plan. The realignment of the structure ensured the centralisation of crosscutting functions, e.g. Financial Analysis and Funding, which will enhance performance with effective and efficient service delivery.

The department did not achieve the strategic objective on promoting a strong shareholder focusing on the performance indicator on Government Shareholder Management Bill. The department has reprioritised the target of this performance indicator to be achieved 2021/22.

c) Committee Observations

The Committee in the previous BRRR observed that the department does not consider other sub-programmes in this programme its planning and annual reporting framework. The Committee welcomes the realignment of the structure and efforts for skills intervention. However, the Committee remains concerned about the department’s high vacancy rate, which is 16% compare to the previous year’s 13% vacancy rate. It also notes with serious concern that most vacancies at the SMS level from Director-General, Deputy Director-General, Chief Director and Senior Manager are filled on acting capacity. This makes it difficult for those discharged with these roles on acting capacity to fulfill key responsibilities and apply delegations’ frameworks accordingly. The Committee therefore urges the department to recruit and confirm these roles as they have a bearing on it discharging its mandate and effectively fulfilling its strategic objectives.

1. Programme 2: SOC Governance Assurance and Performance

1. Purpose

Provide and enforce SOCs governance, legal assurance, financial and non-financial performance monitoring, evaluation and reporting systems, in support of the shareholder, to ensure alignment with government’s priorities.

b) Programme performance

The department reports several achievements on the programme’s strategic objectives. Some of the notable achievements were the establishment of the shareholder anti-fraud hotline, producing two progress reports on lifestyle audits, 65 forensic audit reviews and producing of a governance and risk practices report.

During 2018/19, Cabinet approved the establishment of the Presidential SOE Council which has been tasked with providing political and strategic oversight in order to reposition the SOCs as effective instruments of economic development. The department was appointed to serve as secretariat to the Council and has begun preparations for the first meeting. A Shareholder Management Policy is in development and is ready for consideration by the Presidential SOE Council.

In line with pronouncements of the 2018 SONA on eradicating fraud and corruption, the Boards in the portfolio were reviewed. Cabinet approved the appointment of new Boards for Transnet, Denel, SA Express and SAFCOL. In November 2018, the four existing Non-Executive Directors (NEDs) on the Alexkor Board were reappointed to the Board.

The department held ongoing consultations with SOCs in the portfolio to implement the Cabinet-approved Guide for SOCs’ Remuneration and Incentives for Executive Directors, Prescribed Officers and non-Executive Directors. The Guide for SOCs intends to standardise remuneration practices for Boards and Executives in the portfolio and Government. In 2019/20 the SOCs will continue aligning their remuneration policies to the Guide to ensure consistency in remuneration practices within the portfolio.

The Overvaal Resort Act 127 of 1993 is Aventura’s foundation Legislation. In 2001 Government took a decision to dispose of all Aventura Resorts. Due to disposal process challenges in 2013 a Shareholder’s Resolution was passed to wind up Aventura through liquidation. The liquidation of Aventura was subsequently finalised in 2017. As part of completing the winding up of Aventura, its founding Legislation was repealed. During the 2018/19 financial year the process to repeal Aventura’s founding legislation was finalised.

c) Committee Observations

The Committee notes the achievements made in the programme. The Committee is concerned that the corrective measures to improve the SOCs performance have not been sufficiently addressed. The Committee reemphasises the need for this programme to also play a transversal function in monitoring the departmental and SOCs performance. This should be done through “dashboards” which will provide an opportunity for the department to detect early warnings enabling it with the ability to implement corrective measures. Furthermore, coordination of legislative prescripts should be sufficiently pursued to unlock the value of SOCs performance. This requires an interdepartmental and intergovernmental coordination to deal with constraints that hamper economic development in operational environments of SOCs and SOCs’ financial performance.

 5.2.3   Programme 3: Business Enhancement and Industrialisation

a) Purpose

To provide sector oversight to enhance the business of SOCs by advancing industrialisation, transformation, intergovernmental relations and international collaboration services; and to support the Shareholder to strategically position and enhance the operations of SOCs and attainment of desired strategic outcomes and objectives by SOCs. The sub-programme in this programme as follows: business enhancement services, energy resources, transport and defence, research and economic modelling.

1. Business Enhancement Services

1. Skills Development

During the 2018/19 financial year, DPE facilitated SOCs’ contributions to the development of scarce and critical skills towards achievement of government’s skills development objectives with enrolment of new learners for occupations such as artisans, technicians and engineers, as well as enrolment and training of learners in sector specific occupations. SOC contributions to development of scarce and critical skills is facilitated to address skills gaps for SOCs’ operational requirements, including training of additional artisans for the national pool as defined in Shareholder Compacts towards achievement of objectives of the National Skills Development Strategy (NSDS) III and for the 2014-19 MTSF Outcome 5: A skilled and capable workforce to support an inclusive growth path as well as support other related policy frameworks. However, a number of DPE SOCs have had to decrease their investment in skills development due to their current financial constraints which affect the optimisation of training facilities to a certain level in SOCs such as Transnet, Eskom and Denel.

1.  Industrialisation and Localisation

The sub-programme came into effect in Quarter 4 with the implementation of the new structure. It took over the project that had been initiated in Manufacturing Enterprises to review the Competitive Supplier Development Programme (CSDP) and develop a strategy to leverage SOC capital spend for the industrialisation and localisation objectives. Work on the Industrialisation and Localisation Strategy will be completed by end of Quarter 1 of the 2019/20 financial year. However, leveraging the effort has resulted in an Enterprise and Supplier Development strategy that will be rolled out in 2019/20 going forward.

1. Environmental Alignment

The Department, in compliance with the National Environmental Management Act (NEMA) of 2014 and in order to better manage environmental compliance and oversight activities, has developed an environmental implementation plan which is awaiting approval by the Department of Environmental Affairs (DEA). The plan envisages the Department ensuring that each SOC has a compliant environmental plan in place, and that it is implemented. Further, a representative sample of SOC operational areas will be visited on an annual basis to ensure compliance with agreed plans.

c) Committee Observations

The Committee notes the achievements on this sub-programme. The decrease in skills development investments in SOCs is worrying as critical skills for the economy are required. It is imperative that the department find suitable solutions to address this challenge. The Committee is in its interactions with SOCs has noted that spend on BBBEE targets has decreased in some SOCs. This is reversing the work that government has already started in reaching economic transformation targets. The inability for SOCs to implement legislative requirements such as the Preferential Procurement Policy Framework Act (PPPFA) is also a concern as this results in local industries being developed. The department should provide oversight and find ways to deal sufficiency with areas of bottlenecks. Efforts to design implementation plans which respond to environmental targets should align to the government’s Carbon Tax Act 2019.

d) Energy Resources

i) Eskom

During the financial year, the Department successfully directed Eskom to focus on developing short-term plans to stabilise the power system to avert load shedding. These plans also seek to address the long-term sustainability of the generation fleet. The appointment of the Ministerial Technical Task Team assisted the Department in working with Eskom to stress-test the Generation Recovery Plan including the nine-point plan, and to assess its robustness in dealing with the energy shortages due to unavailability of plants caused by breakdowns.

The Department has also ceased with the assessment and the finalisation of the optimal capital structure of Eskom considering the financial difficulties and the debt burden the company is currently facing. This work will support Eskom’s Strategic Turnaround plan.

ii) Safcol

Safcol’s Mozambican subsidiary IFLOMA has submitted a strategy and Business Plan. This was a key milestone for the entity after a few years of the company not being operational. IFLOMA has full support of the local and district leadership post visits by the DPE and SAFCOL. It is anticipated that IFLOMA will break even in the 2019/20 FY. SAFCOL continues to contribute to local communities through social infrastructure while awaiting settlement of land claims by the Department of Rural Development and Land Reform (DRDLR).

iii) Alexkor

Alexkor’s financial position continued to deteriorate during the 2018/19 FY. The joint venture also experienced a challenging year despite a 15% improvement in carat production compared to the previous year (48 000 carat in the 2018/19 FY vs 41 000 carat in the 2017/18 FY. The operations did not achieve the expected revenues due to an increased volume of poor-quality diamonds. Turnaround strategies will be explored in the coming FY in an attempt to improve carat production. The handover of properties to various institutions has commenced with the first property to be transferred by the 1st of July 2019.

e) Committee Observations

The Committee notes with financial challenges from Eskom. Whilst the cost drivers were determined and outlined in Eskom’s financial report to the Committee as the cost of debt, operational expenses and non-payment from municipalities. The Committee is concerned with higher costs associated with the build programme. The challenges experienced on the technical design of the build programme is also a concern. The Department of Energy introduced the Integrated Resource Plan (IRP) 2018 targeting the optimisation of energy mix. The Department of Public Enterprises needs to outline the role of Eskom in the attainment of the programme objectives. Further calls for the introduction of renewable energy should be viewed in light with the electricity demands. The guaranteed utilisation associated with Eskom has increase to R400 billion placing Eskom’s liquidity under pressure. The Committee will provide oversight and guidance on the policy pronouncement by government on the unbundling of Eskom into three entities namely; generation, transmission and distribution. 

The Committee is concerned about SAFCOL’s future role as a result of legacy issues such as land claims. The developments with regards to its subsidiary IFLOMA are noted. The issues on land claims is a concerned as no progress is reported annually. A recommendation in the previous year’s BRRR was made for the Department to find mechanisms to resolve the impasse through interface of Ministers, the Economic Sectors, Employment and Infrastructure Cluster and a Cabinet decision. Progress report regarding this is yet to be tabled to the Committee.

The Committee is concerned with the future sustainability of Alexkor. In this financial year Alexkor was unable to submit its annual financial statements as a results an audit that could not be performed.  An administrator has been appointed to deal with challenges facing the entity. The Committee is concerned with the operational and financial challenges of Alexkor which are resulting in employees not being paid and in some cases retrenched. The depletion of cash reserves resulting from losses made by Alexkor and the PSJV will lead to a decline in the socio-economic development outcomes of the communities in the Richtersveld and Alexandra Bay. The department should seek ways to address the legacy issues such as the implementation of the Deed of Settlement (DoS), the establishment of the Community Property Association (CPA), township establishment and community rehabilitation programme. The department should provide the Committee with the future role for Alexkor in light with the challenges faced by the SOC.

5.2.4 Sub-programme – Transport and Defence

This sub-programme includes South African Airways (SAA), South African Express (SAX), Transnet and Denel.

a) SAA

During the 2018/19 FY the Department took over the Executive Authority responsibility for SAA. The Department oversaw the transfer of the R5 billion of funding allocated to SAA, negotiating financing with banks and submitting guarantee and funding applications on behalf of SAA, amongst others. The company made good progress in implementing its long-term turnaround strategy, finishing the year in a better position than budgeted. The company has been optimising its route network, with almost all of its local and regional routes now profitable. The airline concluded a Memorandum of Understanding with Emirates and Mauritius Airlines, which will assist in improving the performance of the international routes. Procurement processes were strengthened to eliminate corruption and achieve cost savings. The airline reduced employee costs by seconding pilots to other airlines and offering voluntary severance packages to other staff members. The airline has a continued focus on enhancing performance and driving down costs at South African Airways Technical (SAAT).

b) SA Express Airways

With the support of the Department, SA Express successfully returned to service after it was grounded in 2018 by the South African Civil Aviation Authority (SACAA). Following its return to service the company put in place its turnaround plan aimed at addressing its operational and financial challenges; this is currently in implementation. The airline has gradually reintroduced routes as aircraft were brought back into operation; it has also filled a number of key leadership positions. During the 2018/19 financial year, SA Express received a recapitalisation of R1.249 billion.  A Cabinet Memorandum outlining strategic options for SAA and recommending an optimal corporate structure for the state-owned aviation assets was submitted for Cabinet’s consideration.

c) Denel

Although it took time for Denel to gain traction in implementing its turnaround strategy, there was a marked improvement following the appointment of the new Executive Management. The plan seeks to strengthen governance, improve programme management and restructure the business to improve efficiency. Non-core businesses will be excised, and the property portfolio monetised.

In September 2018, Denel was given an additional R1 billion Government Guarantee which took the total guaranteed debt to R3.43 billion. The guarantee facility was extended for a further five-year period, expiring in September 2023. The Department has been supporting the company through inter alia, engaging with the Department of Defence (DOD), Armscor and National Treasury, to ensure alignment with the key strategic initiatives as well as assisting the company in engaging with lenders to rollover and refinance its existing debt; and to raise additional financing.

d) Transnet

Transnet, and in particular its general freight business, has an important role to play in improving the cost-effectiveness, efficiency and reliability of the country’s freight transportation system and achieving a shift from road to rail. This will reduce the damage, pollution, congestion and accidents on the country’s roads. Over the last five years, the amount of freight transported by rail has remained stagnant. The Department is working with Transnet to develop plans for addressing the challenges preventing more freight from being transported by rail. Similarly, the port performance lagged the MTSF targets that had been set, and interventions to improve the performance of the ports are also being developed.

Due to the slow-down in the economy, Transnet scaled back on its capital expenditure programme in order to more closely match the slower growth in demand. This also resulted in a reduction in its borrowings. The company maintained a sound financial position and is not reliant on fiscal support for funding.

e) Committee Observations

The Committee notes achievement made in the programme. The current operational and financial performance of SAA and SAX is concerning. The Committee is concerned about the governance of SAA and leadership as it has no permanent Chairman and CEO. The airline did not submit its annual financial results to the Committee resulting in an audit not performed. SAA’s debt has increased to R6.5 billion. The Committee is concerned with the SAA’s inability to implement a sound turnaround plan. It is imperative for the department to design clarity of critical levers which will set the airline on a path to being more competitive. Policy pronouncement on a strategic equity partner should be considered. A recommendation made in the previous BRRR was rationalisation of state aviation assets which will pave a way of merging SAA, Mango and South African Express Airways into a single entity. The department should provide a progress report regarding this recommendation.

The Committee notes Transnet’s performance. The Committee commend Transnet for performing well under a distressed economic environment. The financial results display good performance with revenue increasing to 1.6% resulting in R74.1 billion and a 24.7% increase in profit to R6.0 billion. BBEEE spend amounted to R29.93 billion or 92.62% of total measured procurement spend per DTI codes. The Committee urges the department to continue monitoring Transnet as there are still challenges emanating from the previous year’s report on irregular and fruitless expenditure. The efficiency and effectiveness of the port systems and rail system could be enhanced for improved performance. The Committee further observes that Transnet’s asset valuation capacity could be enhanced and improved. The Committee urges to the department and Transnet to address issues raised by the Auditor-General.

‘Going concern has been emphasised in the current financial year and the prior financial year, this is due to breach of loan covenants as a result of the modification of the audit opinion which triggers a potential recall of certain loans facilities and as well as the potential to trigger “cross default” clauses on other facilities.  In the event that this should materialise, there would be insufficient resources for Transnet to meet these its obligations in the ordinary course of business’.

The Committee observed that Denel faced operational challenges resulting from financial challenges. This resulted in employee salaries not paid and decline in productivity in some of the business units. In its oversight visit the Committee observed that the plant and equipment at Denel PMP was outdated and the average age of employees working the business units were closer to retirement. The Committee urged Denel that strategies to improve on the productivity at Denel PMP should be developed and ways to attract young people should be explored. The current financial support package should go further that addressing operational challenges to improvements in the company’s competitive edge.

5.2.6 Sub-programme – Research and Modelling

The sub-programme is responsible for the following:

• Economic modelling conducts appropriate macroeconomic modelling and research to enhance links between industrial policy, macroeconomic policy and the role of SOCs in economic development. To conduct socio-economic impact assessments resulting from SOCs’ economic activities.
• Research modelling conducts topical research to inform the development of policies and strategies.

a) Sub-programme performance

Overall, the research output helped the Department to engage in evidence-based policy discussions and make informed decisions with the various stakeholders. For example, the Department’s research showed that Transnet’s projects can create both temporary and permanent employment opportunities through capital investment and this is now contributing to accelerating transformation of the South African economy. Furthermore, the findings of the research indicated that Transnet and SOCs in general should not continue to reduce their capital investments as this could have significant socio-economic implications and impact negatively on economic arrangements. Rather, the existing capital investment should at the least be maintained. However, consultation with stakeholders is necessary to establish full impact. Research on the determinants of aggregate demand in South Africa helped to inform the various discussions and deliberations on electricity supply and demand, including inputs into the Integrated Energy Resource Plan discussions (IERP).

The Black Industrialist Programme entailed the development of Black Industrialist business cases to leverage on SOC procurement and industrial capability for consideration within the DTI support programme through the partnership between the two departments. A Business Development Unit (PMU) managed under the Central University of Technology Innovation Services (CUTs) together with the Enterprises Unit of the University of Pretoria were commissioned for undertaking this exercise. In this regard, the knowledge and experience of the universities were channelled towards the project. The crux of this initiative was to provide leadership to maximise the focus on growing the number of start-up enterprises that becomes industrialist and create much needed jobs. The enterprises are to be supported through consideration of business cases with the potential to create manufacturing footprint of products and services with demand from the SOCs, thus giving a tangible expression to accelerating transformation of the South African economy. The creation of these industrialists will create jobs.

b) The Enterprise Development Programme

Specific interventions undertaken entailed reviewing procurement solicitations to maximise opportunities for SMMEs, using targeted assistance mechanisms, including suggested alternative procurement packaging to optimise opportunities for SMMEs. The nature of interventions begged on two important virtues, the importance of building creative solutions as well as the importance of collaborations. The former was made possible through the mutual engagement of the various Fora for Transformation as per the Departmental Transformation Framework and Guidelines (TFG) document. The document supplicates the Department to focus on four areas for Transformation, namely: Job Creation, Skills Development, Enterprise Supplier Development (ESD) and Corporate Social Investment (CSI). Furthermore, the document proposed mechanisms for relationship-building to make it possible to gain information about the individual SOCs with regard to the four elements of transformation. With regard to collaborations, the Department lurched on the Memorandum of Understanding with the Department of Small Business Development (DSBD) whose intention is to facilitate joint cooperation in the delivery of, among others, pragmatic guidance and related interventions to heighten SMME support by SOCs in DPE’s portfolio. DPE will therefore continue embarking on initiatives within this relationship with DSBD to realise the objectives of the MOU and to coordinate efforts to build growing support for SMME development.

The department has realigned its organisational structure to better execute on its mandate. The changes will drive operational efficiencies to improve the Department’s ability to support its oversight functions of the SOCs. In order to deliver on its mandate, the department needs to fill the SMS positions with requisite skills. The role of the Director-General is critical and should be filled in line with the requirements of the National Treasury and DPSA prescripts. The department has performed well on it set targets. The policy pronouncements and the department’s ability to translate these articulations into action plans will determine success and improved performance in the SOC environment. It is imperative that the department asserts its leadership role in SOCs oversight and governance.

6. Service Delivery and Financial Performance Assessment

There is progress on some of the targets which the department has been recommended by the Committee to improve on. The recommitment of strengthening shareholder support through the Shareholder Management Bill is a right step towards improving governance of SOCs. The target will be achieved in 2021/22. The achievement on anti-fraud hotline, performing lifestyle audits, forensic reviews and appointment of boards is a provides the department with the platform towards restoring the public confidence and effecting clean governance in SOCs. It is imperative that the administration programme sustain these efforts and ensure timeous reporting to the Committee on progress relating to these strategic objectives. An incorporation of the key policy steps pronounced by government should be evident in the planning, monitoring and reporting requirements of the department.  

A dedication of a sub-programme dealing with financial assessment and investment support will enhance the financial oversight mechanism of the department. Achievement noted in the following, 27 financial review reports, corporate plans reviews, draft accounting framework developed and optimal capital structure proposed for the three SOCs.  There is a commitment to improve on the standardised operating procedures on borrowing guarantees and financial reporting frameworks. This is will enhance financial sustainability of SOCs.

A key factor in economic development outcomes is skills development to meet the requirements of an economy. The department needs to make improvements in this area of focus as it is critical in its mandate. The transformation of an economy remains critical, therefore, monitoring tools, partnerships and other coordination mechanisms should be developed to enhance this performance indicator. It is critical that other mechanism to diversify both skills and industries are developed in line with government’s industrial policy aspirations. The development of local industries is an effective tool which government has identified to create jobs in the economy. The department is central in the development of implementation plans which support local industries and contribute to creation of decent jobs. An interdepartmental, intergovernmental and partnerships with key stakeholders is essential in realising this objective.

The sub-programmes on the energy resources, transport and defence resources have notable achievements. However non-achievement on signing shareholder compacts was reported. It is critical for the department to achieve on this performance indicator as it set the benchmark for the performance of SOCs. The inability to finalise shareholder compacts place both the department and entity at risk of not confirming the shareholder performance agreement with the board and executives. Therefore, is it difficult to assess and measure performance outcomes based on a contract that has not been concluded. The department and SOCs should shorten the time of negotiations in order to conclude these contracts on time.

7. Concluding Remarks

The department has effected key changes within its organisational structure to respond to the policy direction of government to address the challenges faced by SOCs. The policy articulations by the President, Minister of Finance and Minister of Public Enterprises is consistent in ensuring that SOCs’ performance is improved. It has been noted that performance in SOCs is a function of strong boards, good liquidity position and independence of regulators. The gearing levels, interference, attempt to cater for all stakeholder needs and financial dependence on government negatively affect SOCs’ performance. The results of interference and overreach has been evident in cases where boards were compromised, procurement systems weakened, resulting operational inefficiency and financial ruin for most SOCs.

The department has task ahead to implement legislative prescripts, create strategies and implements plan that will unlock the value that will enhance performance in SOCs. The restricting process called by government to transform the role of SOCs is critical. Whilst ownership questions remain, it is crucial to note that SOCs cannot perform optimally in their current form. The continual bailouts and guarantees are placing the South African economy at risk. A model which will limit government exposure through providing guarantees and financial support to SOCs is currently explored by the Minister of Finance. It is important that the department partners with National Treasury in the development of a sustainable business model. This will assert the role and mandate of the department as the restructuring process unfolds.

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. Discourage having officials acting in positions for long periods within the Department and ensure that all vacancies are filled, particularly those of the Director-General and all Senior Management Services (SMS) within this financial year.
   2. Ensure the capacitation of the internal audit function in the Department and State-Owned Companies to institute audit and risk assessments in boards in line with the provisions of the Public Finance Management Act.
   3. Together with the Department of Planning, Monitoring and Evaluation, develop mechanisms for appropriate sanctions to discourage poor performance, ensure that the attainment of targets in the annual performance plans are aligned to budget planning and spending performance. 
   4. Institute timely consequences for executives and management who deliberately or negligently ignore their duties and contravene legislation. A list of action taken against transgressors must be provided quarterly to the Committee for follow up of all irregular, fruitless and wasteful expenditure.
   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 2020.
   6. Present the Committee with a funding plan, cost containment and revenue maximisation strategy for Eskom, SAA, Alexkor, SAX and Denel before the end of the financial year.
   7. Ensure that shareholder compacts are signed on time and submitted to the Committee to enhance its oversight role within a month of signing.
   8. Present a model for SOC oversight per programme, with clear targets on monitoring, evaluations and reporting within this financial year.
   9. Present quarterly progress report to the Committee reports on the SOC restructuring process and the unbundling of Eskom into three entities namely: Generation, Transmission and Distribution.
   10. Improve communication in SOCs in order to educate the public on the role of SOCs, their capabilities and their developmental role in the economy.
   11. Present quarterly progress reports on the development of the Shareholder Management Bill to the Committee.
   12. Ensure that all SOCs meet performance targets on skills development, job creation and localisation strategies and provide the Committee with quarterly reports.
   13. Provide the Committee with quarterly reports on the assessments on sales of non-core assets of SOCs.
   14. Provide the Committee with progress report to ensure that Alexkor, South African Airways and South African Express Airways are able to submit their annual financial statements on time as per the Public Finance Management Act. The report should contain lasting mechanisms of avoiding such occurrences going forward in all SOCs.  The report must be submitted to the Committee within this financial year.
   15. Provide the Committee with progress update efforts to ensure Alexkor achieves its public and commercial mandate, especially addressing socio-economic outcomes of the Richtersveld and Alexandra Bay communities.
   16. Ensure that the future role of SAFCOL is clarified and that the commercial and public mandates are diversified and expanded, and community land claims issues are resolved.
   17. Ensure that all the recommendations by the Auditor-General are sufficiently addressed and progress reported to the Committee on a quarterly basis.
   18. Ensure that there is ethical leadership in boards and ensure appropriate sanction for breaches and transgressions in SOCs.
   19. Ensure that all board members and executives of state-owned companies are vetted and are subjected to a lifestyle audit within this financial year.
   20. Immediately strengthen and improve the department’s oversight effectiveness over its SOCs 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.
• That the financial affairs and performance 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 SOCs.
  1. Provide the Committee with quarterly progress reports regarding the implementation of these recommendations, and
  2. Provide the Committee with timeous updates in writing on developments and events that could potentially adversely affect SOCs or the public. This information should be submitted to the Committee within two working days of receiving the information or date of incident.    

The Committee notes the MTEF funding request and the MTBPS funding already given to SAA, Denel and SAX. The Committee will engage further with the Department of Public Enterprises and the relevant entities in executing its oversight responsibilities. The Committee would like to express its gratitude to the Auditor-General, management of the Department of Public Enterprises, state-owned companies 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 (2019)

[2] Ibid

[3] National Treasury (2018a)

[4] National Treasury (2018b)

[5] National Treasury (2019a)

[6] Ibid

[7] Department of Public Enterprises (2019)

[8] National Treasury (2018)

[9] Department of Public Enterprises (2019)

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

[11] Denel (2019)

[12] Gordhan (2019)

[13] SAFCOL (2019)

[14] Eskom (2019)

[15] Transnet (2019)

[16] National Treasury (2018b)

[17] National Treasury (2019a)

[18] Tlhakudi (2019) This section is taken from this correspondence.