Report: Budget Vote 11and Strategic Plan of the Department for 20012/13 – 2016/17, dated 10 May 2012

Report of the Portfolio Committee on Public Enterprises on Budget Vote 11: Public Enterprises, and Strategic Plan of the Department of Public Enterprises for 20012/13 – 2016/17, dated 10 May 2012

The Portfolio Committee on Public Enterprises, after receiving a briefing from the Department of Public Enterprises on the strategic plan and budget vote, reports as follows:

1. Introduction

Guided by the Rules of Parliament, promulgated in terms of the Constitution, the Portfolio Committee on Public Enterprises plays an oversight role on the Ministry, Department and the entities. The Committee has to scrutinise the strategic plan document of the Department and its entities in order to determine whether the funds requested are aligned to the objectives as stated in the respective strategic plan documents .

2. Background

The Department has undertaken an organisational review process which resulted in the development of a new organisational model and functional structure in line with its strategic objectives. Concurrently, a new strategic plan for the Department has been developed and describes in detail the objectives and work that the Department will undertake in the period 2012-2016, guided by the overarching policy and strategic direction and priorities of Government, as articulated in the New Growth Path, the draft National Development Plan, and the recent State of the Nation Address by President Jacob Zuma.

3. Strategic Plan of Department of Public Enterprises

The Department of Public Enterprises’ 20012/13 – 2016/17 strategic plan is informed by the following new vision:

3.1 Vision of the Department

To drive investment, productivity and transformation in its portfolio of state-owned companies (SOCs), their customers and their suppliers to unlock growth, drive industrialisation, create jobs and develop skills.

3.2 Entities reporting to the Department of Public Enterprises

For the financial year under review the Department has been responsible for nine state-owned enterprises listed in schedule 2 of the Public Finance Management Act (Act 1 of 1999). These are Alexkor, Broadband Infrastructure Company (InfraCo), Denel, Eskom, Pebble Bed Modular Reactor (PBMR) (Pty), Safcol, South African Airways (SAA), South African Express and Transnet. The Department’s overall objectives are to provide an effective state-owned enterprise shareholder management system and to support and promote economic efficiency within each of the state-owned enterprises.

3.3 Strategic role of the Department of Public Enterprises

The Department of Public Enterprises has a distinct mandate of shareholder management on behalf of the state. In the period ahead, the Department will focus on:

3.3.1 Consolidating the Shareholder Management Model;

3.3.2 Shifting of emphasis to ensure that SOCs drive investment, growth and employment;

3.3.3 Overseeing the strategic, financial and operational turnaround of challenged SOCs.

3.4 An Efficient, Competitive and Responsive Economic Infrastructure Network

(Outcome 6)

The Department is focused on achieving the outputs and sub-outputs linked to outcome 6 and those contained in the Minister’s Service Delivery Agreement.

These are:

3.4.1 Improving the delivery and maintenance of infrastructure and monitoring the

roll-out of Transnet and Eskom’s build programmes;

3.4.2 Achieving policy and regulatory clarity in sectors in which the state-owned

companies operate;

3.4.3 Improving the operational efficiencies of the state-owned companies,

particularly in relation to the reliable delivery of rail and ports services and

the reliable generation, distribution and transmission of electricity; and

3.4.4 Developing operational indicators for each of the required sub-outputs

identified as part of the delivery agreement. Where necessary, these will be

included in the shareholder compacts concluded between the Boards of the

SOCs and the Minister.

3.5 Performance of Department in relation to Outcome 6

This is how the Department has performed in relation to outcome 6:

3.5.1 Improving competition and regulation

· Work on the Rail Policy and Rail Act has progressed to the finalisation of a

draft green paper, including industry stakeholder consultations.

· A private sector participation (PSP) framework has been developed to

address private sector participation in rail infrastructure investment.

3.5.2 Generation, distribution and transmission of energy

· Legislation for the creation of an Independent Electricity System Operator (ISMO) was introduced in Parliament by the Department of Energy and is expected to be promulgated during 2012.

· Following the Minister’s directive, Eskom has ring-fenced the System and Market Operator (SMO) unit. The implementation plan to establish the SMO as a subsidiary is being finalised.

· Approximately 248 000 households were electrified during the period from November 2010 to November 2011, and 3 655 homes were connected to off-grid solar systems.

Eskom build programme (as end of 2011)

· Medupi is 35% complete, with 56.9% of the budget having being spent.

· Kusile is 17% complete, with 30% of the budget having being spent.

· Ingula is 41% complete, with 54.3% of the budget having being spent.

· The Return-to-Service programme is 93.5% complete, with 89% of the budget having being spent.

· Transmission projects are more than 70% complete, with 70.4% of the budget having being spent.

· A cooperation agreement between Eskom and Transnet was signed in November 2011 on the development and implementation of a Coal Haulage Road -to-Rail Logistics for Eskom’s fleet of coal-fired power stations.

· The resulting haulage agreement details the routes and sources of coal to be transported to Eskom powers stations.

3.5.3 Logistics: road, rail and ports

The Department reported achievements with regard to:

• Increasing the market share of total freight from a 177 million tons

per annum (mtpa) baseline for rail to an annualised 250 mtpa by 2014, 178

mtpa was achieved in 2010/11. Up to December 2011, 148mtpa was recorded

and Transnet is on track to achieve 206 mtpa by the end of the 2011/12

financial year.

• Productivity improvements at the Durban container terminal (DCT),

an average of 24.8 crane moves per hour was achieved in 2010/11, from 21

crane moves/hour in 2009/10, in line with the target of 25 crane moves/hour for

that year.

• Transnet’s build projects are generally on track. Two container berths at the

Ngqura port have been completed and an additional two container berths will be

completed by March 2012. A total of 875 000 containers has been handled at

Ngqura since it opened in October 2009, and the additional two berths will

improve capacity to 800 000 containers per annum.

• The National Multi Products Pipeline (NMPP) 24-inch trunk line for petroleum

products from Durban to Jameson Park was completed and commissioned in

January 2012.

• Three rail branchline opportunities for private sector concession in 2012/13 have

been identified and there has been consultation with KwaZulu-Natal , Northern Cape , and Free State provinces in this regard.

3.5.4 Information and communication technology

• As part of its mandate to increase access to broadband services, Broadband

Infraco has access to 18 Points of Presence (POPs), of which 5 are open access

sites in the main centres .

• Wholesale broadband prices have dropped by about 73% due to the establishment of Broadband Infraco,

• Sentech and Broadband Infraco have also commenced with the Broadband Plan

for the Kwazulu-Natal province pilot project, and site surveys on three districts

have been completed.

3.6 Departmental Challenges

3.6.1 The current prioritisation of infrastructure expansion for growth and employment creation and the role of DPE’s SOCs, especially the infrastructure SOCs (Eskom, Transnet and Broadband Infraco) will challenge and shape the future trajectory of the Department.

3.6.2 Capacity to oversee the investment programmes and its intended impacts, i.e.

industrialisation, job creation, skills development, etc, both from a shareholder perspective as well as from an SOC performance perspective.

4. Budget Summary

The Department of Public Enterprises spent 84.15% of its annual appropriation for the 2011/12 financial year, and the remaining R42.6 million is expected to be disbursed before 31 March 2012. For the 2012/13 financial year, the department has been allocated R1, 2 billion. A total amount of R1.05 billion of this budget is transfers meant for both Denel and Alexkor. Denel will receive R700 million while Alexkor has been allocated R350 million of this allocation.

Table 4.1 Budget DPE, 2011/12 to 2014/15

Programme	Budget				Nominal Rand change	Real Rand change	Nominal % change	Real % change
R million	2011/12	2012/13	2013/14	2014/15	2011/12-2012/13		2011/12-2012/13
Administration	101.5	104.4	110.6	116.4	- 2.9	- 2.9	2.86 %	-2.87 %
Legal & Governance	23.3	26.9	31.0	32.9	3.6	2.1	15.45 %	9.02 %
Strategic Partnerships	228.8	1 117.7	69.2	73.8	888.9	826.6	388.51 %	361.29 %
TOTAL	353.3	1 249	210.7	223.2	895.4	825.8	253.22 %	233.54 %

Source: National Treasury (2012)

This year’s budget increased from R353.3 million in 2010/11 to R1.249 billion in 2012/13 as a result of transfers to both Denel and Alexkor. Of this amount, R700 million is earmarked for the recapitalisation of Denel’s Aerostructures division whilst R350 million is earmarked for Alexkor’s outstanding settlements under the Richtersveld Community Deed of Settlement (DoS), including the tax obligation of R69.9 million. The department is only left with less than R200 million to fulfil its oversight responsibilities over State-owned companies. In reality the Department of Public Enterprises has been allocated less than the amount it was allocated for in the 2011/12 financial year which was R353.3 million.

Over the medium term, expenditure is expected to decrease from R1.249 billion to R210.7 million, at an average annual rate of 14.2 per cent, as a result of further reductions in transfer payments to State-owned companies. Spending on compensation of employees is expected to increase to R118.1 million over the medium term, at an average annual rate of 5.7 per cent, due to adjustments for improved conditions of service and an increase in the department’s staff complement.

Spending on goods and services is expected to increase to R102.4 million over the medium term, at an average annual rate of 2.8 per cent, to provide support to the larger personnel establishment. Spending on consultants decreased from R50.9 million in 2008/09 to R42.5 million in 2011/12, at an average annual rate of 5.8 per cent, and is expected to decrease further to R35.3 million over the medium term, at an average annual rate of 6 per cent, due to the increased capacity within the department. Consultants were used mainly for business and legal advice, internal audit and IT services.

5. Departmental Programmes

The department has undertaken some programme restructuring in line with its new vision of “driving investment, productivity and transformation in its portfolio of SOCs, their customers and suppliers so as to unlock growth, drive industrialization, create jobs and develop skills.” The department has consolidated its six programmes into only three, and this also to make it easier for treasury to cluster departmental budgets without creating the impression that, for example, the DPE’s Transport Enterprises programme (which has now been transformed into a sub-programme) belongs to the Department of Transport.

5.1 Administration

The programme’s mandate is to provide strategic management, direction and administrative support to the department, which enables the department to meet its strategic objectives. The programme is expected to spend about R104.4 million in total from the department’s budget for the 2012/13 financial year. The programme’s priority areas include the following:

5.1.1 Continuous performance improvement to ensure delivery of the department’s strategic goals.

5.1.2 Effective talent management and attraction and retention of key skills.

5.1.3 Consistent and clear messaging on Government’s intent for state-owned

companies.

5.1.4 Implementation and improvement of appropriate policies, processes,

procedures, time lines and co-ordination and management of outcomes-

based reporting.

5.2 Legal and Governance

The programme is responsible for providing legal services and corporate governance systems, and to facilitate the implementation of all legal aspects of transactions that are strategically important to the department and the state-owned companies, and ensure alignment with Government’s strategic intent by, among others, monitoring the State-owned companies. The programme’s expenditure for the 2012/13 financial year is expected to reach R26.9 million, and key focus areas include the following:

5.2.1 To provide legal services to the department and support oversight of state-owned companies as well as to develop effective corporate governance and shareholder management services on an ongoing basis.

5.2.2 To facilitate effective monitoring of corporate governance and compliance

indicators within the department as well as the state-owned companies via

the Isibuko Dashboard on a quarterly basis, and to monitor and assess the

impact of various pieces of legislation on state-owned companies and

alerting them to changes and possible risks when detected.

5.2.3 To repeal the Aventura Resort Act: this will be initiated once the process to

wind up and deregister Aventura is completed.

5.3 Portfolio Management and Strategic Partnerships

The programme is responsible for aligning the corporate strategies of state-owned companies with government’s strategic intent whilst also monitoring and benchmarking their financial and operational performance and capital investment plans. The programme also aligns shareholder oversight with overarching government economic, social and environmental policies, and builds focused strategic partnerships between state-owned companies, strategic customers, suppliers and financial institutions.

The programme expenditure for the 2012/13 financial year is expected to be R1.17 billion, mainly due to two capital transfers to Denel and Alexkor. This programme is as a result of the programme restructuring that has taken place in the department. It has about five sub-programmes namely, Energy and Broadband Enterprises, Manufacturing Enterprises, Transport Enterprises, Economic Impact and Policy Alignment and Strategic Partnership. Key priorities for this programme are subsumed in the following sub-programmes:

5.3.1 Energy and Broadband Enterprises

The priority for this programme is:

• Effective shareholder oversight of Eskom and Broadband Infraco.
• Support Eskom in ensuring security of electricity supply.
• Reduce dependence on the fiscus by monitoring cost escalations, delivery

schedule (time) and quality of the build programme and developing innovative

funding mechanisms.

• Implementation of the PBMR care and maintenance programme.

• Support Broadband Infraco’s efforts towards increased access to broadband.

5.3.2 Manufacturing Enterprises

The priority for this programme is:

• Effective shareholder oversight of Denel.
• Effective shareholder oversight of Alexkor.
• Effective shareholder oversight of Safcol.
• Review of the progress of the 2008 Denel End State Cabinet recommendations.
• Oversight of Richtersveld Deed of Settlement implementation.
• Komatiland claims settlement model.

5.3.3 Transport Enterprise

The priority for this programme is:

• Effective shareholder oversight of Transnet.
• Ensuring the contribution of Transnet to achieving an efficient, competitive and responsive infrastructure (as per Minister’s performance agreement).
• Effective shareholder oversight of SAA and SAX.
• Strengthen financial and liquidity position of SAA and SAX to ensure sustainability of the airlines.

5.3.4 Economic Impact and Policy Alignment

The priority for this programme is:

• Oversee processes to conduct macro-economic modelling, research and impact evaluation and ensure SOCs contribute to New Growth Path.
• Supervise processes to enhance and advance alignment between national industrial policy, macro-economic policy and the role of SOCs and monitor implementation.
• Oversee alignment and the provision of scarce and critical skills by SOCs and their suppliers in support of the National Skills Agenda and the New Growth Path.
• Facilitate partnerships for artisan and technician development to optimise SOC training facilities by increasing the number of artisan learners for the national pool.
• Oversee processes to ensure that SOCs comply with the environmental laws and climate change mitigation measures, while supporting SOC business needs.

6. Committee’s Observations

The Portfolio Committee made the following observations:

6.1 The Committee welcomed the new vision of the Department which is in line with the priorities of government, particularly the shifting of emphasis to ensure that SOCs drive investment, growth and employment.

6.2 The Committee noted the important task of state-owned companies, such as Transnet and Eskom, of driving the infrastructure build programme, and further noted that the Department needs to ensure that these companies have the capacity and resources to deliver the projects successfully.

6.3 The Committee noted the developmental role of SOCs of advancing socio-

economic transformation through job creation, skills development, beneficiation

and the support for small and medium enterprises.

6.4 The committee complemented the Department for the efforts of advancing

transformation in the Department and in the boards and management of SOCs,

particularly the employment of young people.

6.5 The Committee noted with concern the continuously declining budget of the Department, that in reality the department has been allocated less than R200 million and less than the allocation it received last year (as R1,05 billion of their total budget is earmarked for transfers to Denel and Alexkor).

6.6 The department’s budget for the 2012/13 financial year will be inadequate to

address challenges faced by the department, especially on human resource

capacity, which is expected to oversee more than R800 billion of the

infrastructure build programme (R300 billion for Transnet and R500 billion

for Eskom respectively).

6.7 The Committee recognised the challenge of the department to recruit specialist

and technical skills required due to the competitive remuneration packages

offered by the private sector.

6.8 The Committee raised concern about the absence of legislation that empowers

the department to act against non-compliance by SOCs and enforce priorities of

government. It anticipates that the outcomes of the Presidential Review

Committee would address this problem.

6.9 The department has obtained a clean audit for seven consecutive years and there

was a need to ensure that this performance was sustained and improved.

7. Recommendations

The Minister should:

7.1 Ensure that there is a retention strategy in the Department in order to address the shortage of technical and specialist skills.

7.2 Consider expanding the human resource capacity of the Department with

additional employees with specialised technical skills in order to effectively

execute its shareholder management responsibility. The oversight role

of the department should be equal to the strategic and important nature of the

role of SOCs.

Report to be considered.