ATC120125: Report of the Portfolio Committee on Public Enterprises on the Annual Reports of the Department of Public Enterprises and state-owned companies, dated 25 January 2012
Public Enterprises
APPLICATION FOR DAILY ALLOWANCE
Report of the Portfolio Committee on Public Enterprises on the Annual Reports of the Department of Public Enterprises and state-owned companies, dated 25 January 2012
INTRODUCTION
The Portfolio Committee on Public Enterprises, having considered the 2010/11 Annual Reports of the Department of Public Enterprises and its state-owned companies (Alexkor, Denel, Eskom, Infrastructure Company, Safcol, South African Airways (SAA), South African Express (SAX) and Transnet), reports as follows:
The Committee considered the 2010/11 Annual Reports of the Department and those of the state-owned companies (SOCs) as follows: Department of Public Enterprises (DPE) on 12 October, Eskom on 11 October 2011, Denel on 19 October 2011, Infrastructure Company (Infraco) and Alexkor on 8 Nov 2011, South African Airways (SAA) on 25 October 2011, South African Express and Safcol on 1 November 2011, and Transnet on 13 September 2011.
The report seeks to give a summary of what the entities presented to the Portfolio Committee, the findings of the Committee and recommendations on what action needed to be taken to rectify the observations of the Committee.
The Committees major concerns in considering the Annual Reports for 2010 included the following:
An update on the work of the Inter-Ministerial Committee on state-owned enterprises.
The appointment of Board members and their mandates and how these corresponded to the governments notion of a developmental state.
Workers representation on Boards of SOCs.
The remuneration of Chief Executive Officers and Board members.
The security of electricity supply.
How the Departments of Public Enterprises and of Energy worked together to deal with policy issues, for example the Integrated Resource Plan.
Were targets achieved? If not, what were the reasons or challenges?
What lessons have been drawn from the failure to achieve targets and how has this impacted on the performance of the SOE for the year under review?
What were the financial results? Did SOEs receive qualified audit reports?
The growing concern regarding underperforming entities and the financial sustainability of entities.
The focus of the Committee was informed by the priorities set aside by Government in terms of job creation and skills development.
2. ANNUAL REPORT OF THE DEPARTMENT OF PUBLIC ENTERPRISES
The Department of Public Enterprises (DPE) was represented by the Mr T Matona (Director-General), Mr C Forlee (Deputy Director-General: Energy), Ms R Lepule (Deputy Director-General: Transport), Mr A Kamungoma (Acting Deputy Director-General: Chief Investment Portfolio), Ms M Mokholo (Deputy Director-General: Legal and Governance), Mr E Ritchken (Strategic Project Adviser) and Ms S Crosson (Head: Corporate Services)
2.1 Annual Report presentation
The Director-General highlighted the key matters that would be covered in the presentation and informed the Committee that the mandate of the Department emanated from the economic challenges faced by the country. In order for state-owned companies (SOCs) to effectively contribute to the industrial policy there was a need for rigorous shareholder oversight, a coherent policy and regulatory environment, and well co-ordinated government programmes to support targeted SOC initiatives. He identified t hese as the elements of the Departments strategic thrust. He further reported how the different programmes had performed against predetermined objectives.
2.2 Performance of the different programmes
The Department reported the following regarding the performance of the different programmes:
2.2.1 Administration
Standardisation of financial and risk reporting templates and dashboard with enhanced analytical functionality had been developed for all SOCs.
Quarterly shareholder reports submitted on SOCs performance assessments, detection, monitoring and mitigation of cost-cutting shareholder risks.
Capital structure assessment completed for Safcol, Denel, Eskom, Infraco, SAX, SAA and Transnet. A study has been undertaken of the different possibilities for facilitating infrastructure funding required by SOCs.
A five-year review of SOCs has not been completed due to lack of capacity.
2.2.2 Energy and Broadband Enterprises
Shareholder compacts concluded in June 2010.
Monthly, quarterly and annual monitoring completed as planned for the financial year under review.
The Pebble Bed Modular Reactor has been granted exemption and was no longer required to submit corporate plans, shareholder compacts and quarterly reports due to the companys transition to care and maintenance.
A collaborative joint venture between Broadband Infraco and Sentech at an infrastructure level was being established.
2.2.3 Legal, Governance and Transactions
A panel was established to review the 2007 and 2009 DPE guidelines on the remuneration of board members and the executives of SOCs. The panels report was submitted to the Minister in 2010, but Cabinet mandated the department to engage on a new remuneration model prior to returning to Cabinet with a final decision.
2.2.4 Manufacturing Enterprises
The process was underway to align Denels capabilities with the Department of Defence and Military Veterans strategic requirements. This was dependent upon the said Department finalising its defence strategy.
There was an ongoing process between the Department of Public Enterprises, National Treasury, the Department of Defence and Military Veterans and the Department of Trade and Industry to review Denels new mandate.
A position paper on Denel Saab-Aerostructures turnaround strategy had been developed.
A five-year review of Denels performance had not been completed.
The transfer of minority shares to communities by SAFCOL was underway as the Department of Rural Development and Land Reform (DRDLR) was finalising an alternative model for share transfer to ensure that communities did benefit.
The future role of SAFCOL post land claims had commenced.
2.2.5 Transport Enterprises
Financial modelling of Transnets pipelines tariff application and scenarios of tariff increases were completed and first instalment of levy disbursement to Transnet.
The review of SAA and SAX route network as part of the Corporate Plan review.
Business plans for South African Airways Technical (SAAT) and Voyager were completed and submitted.
2.2.6 Joint Project Facility
The skills dashboard had been revised and SOCs capacity and dashboard were operational. SOC reports were submitted, monitored and evaluated.
Trainee artisans, technicians and engineers were supported by SOCs in various programmes, eg bursaries, internships, learnerships and apprenticeships.
2.3 Financial Performance of the Department
The decrease of R3.435 billion in the annual appropriation from R3.991 billion in 2009/10 to R555.549 million in 2010/11 was mainly as a result of a decrease in transfer payments to SOCs.
Under-spending in the Department amounting to R15.548 million was recorded in the current financial year. The amount was made up of current expenditure in the operational budget mainly under Compensation of Employees as a result of some posts that were not filled due to scarcity of specialist skills in the market, as well as under-spending under goods and services which arose due to some projects that were delayed until very late in the year. The Department had requested rollovers from National Treasury for two projects in the sum of R3.378 million in order for them to be completed in the new financial year. The Department did not achieve its 2% under-spending target, which was exceeded by 0,8% in the year under review. There was no substantive impact on delivery within programmes as a result of this under-spending.
2.4 Human Resources
The Department had a challenge of shortage of critical skills which was reported in the previous financial year. The challenge continued to affect the Department, especially when sourcing the requisite skills and experience required for highly specialised functions or projects. In some instances the Department managed to attract the required skills but again struggled as these employees became more experienced and were recruited by SOCs and the private sector.
The Department had a problem with the public sectors remuneration policy which limited the Departments flexibility in offering attractive salary packages, including bonuses, which negated any viable retention strategies. The Department was in the process of reviewing its organisational structure to align it with the mandate and priorities of the Department.
2.5 Committees observations
The Committee raised concerns regarding the following:
The inability of the Department to pick up irregular and fruitless expenditure timeously in SOCs, such as the R8.5 billion fruitless expenditure reported by Transnet.
The slow pace of finalising the executive remuneration review report and the lack of consistency in remuneration across SOCs.
The adverse effects of decisions taken by policy departments and the lack of policy decisions that were hampering the Department.
The escalating costs of power stations and the slow pace of introducing renewables.
The Committee acknowledged the shortage of skills and the inability of the Department to recruit due to competitive market-related packages offered by the private sector.
2.6 Conclusions and recommendations
The Committee resolved that the Department should urgently finalise the executive remuneration report and a report on the recommendations should be submitted to the Committee as soon as it became a public document. The Department should fill the vacancies urgently. The Director-General and CFO should share strategies with other government departments on how to achieve clean audits.
3. ANNUAL REPORT OF DENEL
Denel was represented by the following delegation: Mr Z Kunene (Chairperson of Board), Mr T Sadik (Group CEO), Mr F Mhlontlo (Chief Financial Officer), Ms P Mushungwa (Group Executive: Corporate Affairs), Mr A Kamungoma (Acting Deputy Director-General: Investment Portfolio).
3.1 Performance of the entity
The Chief Executive Officer informed the Committee that the entity had achieved eight of the twelve performance targets as agreed to in the shareholder compact. The entity failed to improve in the following areas: profitability management, reduction of debt and gearing, optimisation of operating expenditure and productivity improvement. He informed the Committee that Denel had a debt of R1.85 billion which posed a threat to the entity. The global economic conditions and the decline in export orders had a negative effect on Denel Saab-Aerostructures (DSA). The entity would be placing more focus on the areas that did not perform well. Furthermore, it would require constant funding from customers in order to strengthen the balance sheet.
The CEO informed the Committee that the company that made an offer to buy a stake of DSA could not satisfy the conditions and the deal could not go through.
3.1.1 Financial performance
The Committee was informed that Denel continued to show progress towards self sustainability. The entity made a profit of R111 million, and generated positive cash of R178 million, an improvement of R522 million from R344 million in 2010. The Defence, Security and Certification clusters generated earnings before interest and tax of R130 million and cash of R278 million . Furthermore, there were positive results as a result of the aerostructures turnaround plan, in terms of reduced operational expenditure.
3.2 Challenges facing the entity
The Committee was informed that the major challenge remained the loss making DSA. The debt was at R1.85 billion at end of March 2011 and the entity required recapitalisation of ± R2 billion. The solvency of R400 million was too low for an organisation the size of Denel and the entity was experiencing low funding levels. Recapitalisation discussions were underway with the Department to strengthen the balance sheet. Denel had presented to the Defence Review Committee to ensure that there was certainty with regard to orders and defence needs of the country. Denel needed political and diplomatic support in order to secure bi-lateral defence cooperation agreements and proactive promotion of Denel business.
3.3 Human Resources and Transformation
Employee wellness and human capital were central to the success of the entity, and Denel had programmes to ensure the production and development of requisite skills. These are some of the interventions and programmes:
Artisan training - the Denel Training Academy enrolled approximately 300
apprentices per annum, but with additional funding the number could increase.
Denel Youth Foundation Training Programme this maths and science
programme enrolled 50 learners per annum. It cost Denel R5.2 million per
year. The entity also had programmes such as Women In Engineering,
outreach programme to schools, learnerships, bursaries and partnerships with
universities. All these were aimed at developing young people and women in
maths and science and to address the challenge of employment equity in the
technical fields.
3.4 Committee observations
The Committee made the following comments:
The Committee welcomed the efforts and improvements that were reported regarding the turnaround strategy of the Denel group. However, it was concerned that the group was still in a loss-making position and Denel Saab-Aerostructures (DSA) was still a risk for the group.
Concern was expressed regarding the lack of accountability on the part of the CEO due to his absence during the oversight and strategic plan of the Committee.
The Committee raised concern at the continued lack of orders from the Department of Defence and Military Veterans, and noted that the proposed solutions were not in Denels control but depended on decisions from policy departments.
What were the prospects of building a competitive aerospace industry in South Africa ?
Clarity was sought on claims and payments to Saab, and the R1.2 billion contracts and assurance was sought that there will be no comebacks in those contracts.
How would Denel emerge from the loss making post-2012?
Clarity was sought whether training that was done was voluntary or mandatory, and whether it was assisting to achieve employment equity targets.
Clarity was sought on how the non-executive directors remuneration was calculated and concern was expressed on the low meeting attendance of some board members.
Clarity was sought whether the CEO would be getting a golden handshake and on the reasons for his departure.
Clarity was sought on the JSE-listed subsidiary of Denel and where the patent of Denel was.
Concern was expressed at the manner in which the annual report was presented as it was silent on the achievements of the entity against pre-determined objectives.
From where were all the beneficiaries of the bursaries sourced in terms of province and cities? What strategies were in place to recruit from rural areas?
Information was needed on all the countries that Denel did business with (exports).
Where have all the skills gone to that were retrenched from the DSA?
Clarity was sought on the money that Denel had not received from government and how it had affected the performance of the entity.
There was a proposal for Denel to partner with Eskom and Transnet on developing surveillance technologies to protect copper cables.
What sort of products was Denel providing to the South African National Defence Force (SANDF)?
3.5 Responses
In his response, Mr Sadik indicated to the Committee that he had sincerely apologised to the Chairperson for all the instances he was unable to honour invitations of the Committee. He responded as follows to questions:
It was the first time that Denel achieved positive financial results. For the entity to be sustainable, there was a need for recapitalisation. Furthermore, there was a need for certainty on the future role of Denel in relation to the SANDF.
There had been efforts to market the DSA and solicit deals from international markets. However, discussions were ongoing.
There was an opportunity and market for South Africa to play a key role in the aerospace industry.
Denel had to pay DSA as it was bound by a contract, and it had never said that the Saab exit would not have financial consequences.
Denel did not sell products to countries in conflict, and complied with all local and international conventions. It was bound by contracts not to disclose to the Committee the countries with which it did business and what it exported. Denel did business with more than 30 countries in Africa .
Denel had no subsidiary that was listed on the JSE and there were no patent listed under Denel.
Denel requested R5.2 billion for recapitalisation and only received R3.5 billion. The entity was inundated with the repayment of the interest of the debt.
The mandate of Denel was to ensure that the SANDF delivered on it constitutional mandate by producing the apparatus needed for that purpose.
The reason Saab exited the contract with DSA was because the contract allowed them to do so. The net asset value of Denel was R654 million.
India was an important partner, and the entity hoped the litigation would be resolved in court.
Assurance was given that the Rooivalk and the Hoefyster were world class and competitive and put South Africa on the map. Some components of the Rooivalk were imported and the countries that supplied the components were uncomfortable with it competing in their local markets.
The morale of staff was improving and the management had regular meetings with trade unions who were consulted thoroughly on issues affecting workers.
3.6 Conclusions
The Committee resolved that Denel should send quarterly progress reports on the turnaround strategy and the restructuring of Denel Saab-Aerostructures. Furthermore it would have a meeting with the Portfolio Committee on Defence and Military Veterans to discuss the orders from the South African National Defence Force.
4. ANNUAL REPORT OF ESKOM
The delegation from Eskom was represented by Mr Zola Tsotsi (Chairperson of Board), Mr Brain Dames (Group CEO), Ms Tsholofelo Molefe (Group Executive: Marketing and Stakeholder Relations), Mr Dan Marokane (Chief Commercial Officer), Mr Kannan Lakmaharan (Group Executive: Strategy and Planning), Mr Chose Choeu (Divisional Executive: Corporate Affairs), Ms Hillary Joffe (Divisional Head: Distributions), Ms Carin de Villiers (Parliamentary Adviser) and Dr Chris Forlee (Deputy Director-General: Energy, Department of Public Enterprises).
4.1 Performance of the entity
The Group CEO gave an overview of the financial year and highlighted the achievements and challenges that the entity had encountered. The annual report was presented as follows:
4.1.1 Financial performance
Tariff increases and the renegotiated Special Pricing Agreements (SPAs) with smelters and mining customers had improved Eskoms financial performance for the financial year under review. The utility made a profit of R8.3 billion for the financial year under review. The renegotiation of the Skorpion SPA relating to commodity-linked revenue had been finalised. The negotiation of the remaining SPAs ( Hillside and Bayside) was expected to be concluded in the medium term.
The revenue of Eskom increased from R71.2 billion in 2010 to R91 billion in 2011 as a result of an environmental levy charged to customers which contributed R4.3 billion, as well as the sale of electricity that increased by 2,7% and below the 4,2% target. The budget shortfall was attributed to redistributions to municipalities, industrial customers (smelters and mining customers) and prepaid customers due to the slower-than-anticipated recovery of the economy. Primary energy costs for the year amounted to R35.8 billion, increasing by 19,8% compared to the previous financial year. Overall, the increase in primary energy cost was made up of coal handling, coal-fired start-ups, gas-fired start-ups and nuclear fuel costs.
In the previous financial year Eskoms key focus was the Path to recovery strategy, which was to bring the Group back to financial stability, and this seemed to have paid off as the Group posted a substantial profit compared to the R3.6 billion reported in the 2010 financial year. This was as a result of tariff increases and the renegotiated special pricing agreements (with smelters and mining customers). The utility will, however, need to sustain this performance by improving on efficiency and embarking on further cost-saving measures.
4.2 Eskom funding challenges
Eskom has a funding plan in place to address its funding shortfall of R300 billion needed to complete its six-year infrastructure build programme. The utility has issued a bond directly from its balance sheet, generating bids to the value of $3.9 billion of which $1.75 billion went to Eskom. To date Eskom has secured about 71% of its funding requirements with the support of government.
4.3 Human resources
Eskom had a total workforce of 41 778 compared to 39 222 the previous financial year. Eskoms top and senior management level was dominated by white males with a low representation of women in general. In the 2010 financial year there were about 97 females at Eskom, occupying both top and senior positions compared to 312 males in the same positions. The Group has implemented an Employment Equity Plan that was supported by a long-term target setting strategy (Equity 2020) to drive the transformational agenda for the next three financial years until 2012/13. The Group prided itself on having achieved its target of people with disabilities with about 1 012 people with disabilities within its fold. Costs on employees increased by 14.1% to an amount of R20.4 billion compared to R17.9 billion in 2010. In terms of numbers, Eskoms employees increased by 2 556 from 39 222 to 41 778.
4.4 Comments and questions
The Committee raised the following questions and concerns:
Concern was raised at whether the funding that had been secured for seven years, would be sufficient and what would happen beyond that time.
Why was the introduction of independent power producers occurring at such a slow pace and what progress had been made?
What contract did Eskom have with municipalities and why could Eskom not distribute to the end user?
The Committee made a plea to Eskom not to list household consumers with the credit bureau for failing to pay, but rather to look at other remedial actions.
Clarity was sought on the circumstances surrounding the protest actions in Soweto . What difficulties was Eskom experiencing with municipalities that were not paying their accounts? Which provinces and municipalities were defaulting?
Clarity was sought on the impact of the high tarrifs on the construction of the Medupi power station and concern was raised regarding the costs of the construction being more expensive than other countries.
Which category of the 4.5 million customers was supplied directly by Eskom and what benefits did they have?
Clarity was sought on the problem of the quality of coal and the reasons why contractors could not meet their deadlines.
Concern was raised regarding the impact of the high cost of electricity on the poor and clarity sought on who the biggest culprits of electricity theft were.
How visible was the top leadership of Eskom to the local branches, customers and communities and how would that improve going forward?
How did Eskom incur fruitless expenditure of R17 million and what steps were taken to recover the loss?
Eskom was commended for having concluded negotiations to end special pricing contracts. Clarity was sought on whether there were any contracts outstanding?
How far was Eskom with rural electrification, and what problems were experienced with farmers and municipalities in advancing this project?
Clarity was sought on the number of offenders prosecuted for stealing electricity.
Until when would the citizenry pay for Eskoms debts? Was the debt strategy the best strategy going forward?
4. 5 Responses from Eskom
In response, the Group CEO responded as follows:
The financial support received from the state was sufficient and the entity would be able to raise the remaining funds through loans. Eskom had not planned what needed to be built beyond Kusile, hence it would be unable to determine the funding requirement beyond seven years.
The shareholder had stressed that Eskom should not be rigid with the balance sheet, but should be flexible to enter into equity partnerships in order to alleviate the pressure on government on future build projects.
Eskom could not be solely responsible for the introduction of Independent Power Producers (IPPs). They charged Eskom 80c per unit, and Eskom sold electricity at 40c per unit. There were programmes that had been initiated by the Department of Energy to introduce IPPs. Four of the six projects in regard to IPPs were operational.
Eskom supplied half the residential customers directly. The challenge was with regard to the backlog of infrastructure in the municipalities.
The Free State had one municipality that had not paid Eskom, and arrangements have been made to settle the debt. The problem with repayments by municipalities was cyclical and was due to the inability of municipalities to collect revenue.
Eskom conceded that the prices of electricity had adverse effects on local industries, but comparatively India and China were very competitive markets, hence the cost of power stations were lower than Medupi.
There were no special prices for customers who were receiving electricity directly from Eskom.
Poor quality coal caused damage to the plant and resulted in high maintenance costs. Eskom has tightened coal specifications with suppliers, and coal that did not satisfy specifications would not be loaded. There was a need for more investment in coal mines.
There was a problem with the boiler contractor not achieving targets as expected, but Eskom was working with the contractors to ensure that the targets were met timeously.
Big companies stole the highest volumes of electricity.
In terms of visibility, Eskoms leadership had visited and met with premiers, mayors, communities and NGOs. Eskom had a programme that made management accessible to employees at branch level.
Eskom had concluded negotiations on special priced contractors, and the only one outstanding was the Bayside contract.
Eskom was not funding the rural electrification programme. The Department of Energy was the one that decided which areas needed to be electrified, while Eskom was only an agent.
Eskom had no intention of approaching international financial markets in the short term.
4.6 Conclusions and Recommendations
The Committee resolved that Eskom should not send the names of household defaulters to the credit bureau and should explore other remedial interventions. It should employ strategies to sustain good relations with communities to minimise conflict and improve accessibility. The Committee would engage with relevant public office-bearers to assist in educating the public on the adverse effects of the non-payment of services. Eskom should send full details to the Committee regarding the list of municipalities that are default customers and the list of electricity/cable theft cases that have been successfully prosecuted. The Committee further resolved that the Department of Public Enterprises should ensure that the process of criminalising copper theft and illegal connections was speedily concluded.
5. ANNUAL REPORT OF SAA
The SAA delegation comprised the following persons: Ms C Carolous (Chairperson of the Board), Ms S Mzimela (CEO), Mr W Meyer (CFO), Ms S Coetzee (General Manager: Legal and Compliance), Ms T Mpshe (General Manager: Human Resources) and Ms R Lepule (Deputy Director-General: Transport, DPE).
5.1 Performance of entity
The Chairperson of the Board gave an overview of the performance of the entity, challenges facing the entity and the industry as a whole and the focus of the entity moving forward. She highlighted the following in her input:
SAA had exceeded most of its key performance indicators (KPIs). The ones that were not met were due to global pressures.
Unlike its competitors, SAA had not received recapitalisation and performed better comparatively.
SAA had made progress in the civil and criminal proceedings for crimes identified in the KPMG report, and governance and compliance measures had been sharpened in the organisation. Progress was also made on litigation matters against SAA in South Africa and globally.
5.1.1 Financial performance
SAA made a profit of R795 million before tax and the subsidiaries had the following achievements:
Mango made a profit of R500 000 and obtained its fifth aircraft.
SAA Technical made a profit of R63.5 million and had started a major business improvement programme.
Air Chef made a profit of R2 million and instituted a turnaround plan focusing on increasing third-party business.
SA Travel Centre renewed focus on providing greater sales support for SAA.
5.1.2 Employment and Skills Development
SAA trained its employees to improve productivity and compliance within the entity in the following areas:
Functional training: trained 2 243 employees;
Legislated and licensing training: trained 5 574 employees;
Corporate skills, leadership and management development: trained 3 794 employees;
Skills development for external parties : 101 delegates trained on short courses, eg painting techniques, welding, electronics, mechanics, electro-plating, turners and machinists, avionics.
The entity made progress in terms of employment equity, but the challenge was the recruitment of people with disabilities and Black pilots.
5.1.3 Governance and Compliance
There were governance improvements across the entity, which included the following:
SAA made significant progress towards compliance, in particular Public Finance Management Act (PFMA) compliance.
Legacy tender procedures, where timely contract extensions and signing of contracts by both parties were not in place, resulted in irregular expenditure of R85 million, but none of the individual irregular expenditure items were of amounts that reached the materiality threshold in terms of section 55(2) of the PFMA. The payment of fines and penalties resulted in fruitless and wasteful expenditure of R2 million.
Legacy competition law non-compliance cases were reduced, but some cases were still open.
A manual system for detecting and reporting irregular, fruitless and wasteful expenditure was introduced.
Delegation of Authority and Supply Chain Management Policy was reviewed.
Bid Adjudication Committee (BAC) terms of reference were reviewed and the BAC was reconstituted.
The Legal and Regulatory Universe was updated.
Consumer Protection Act compliance training for all relevant officials was conducted.
Two foreign criminal cases were successfully defended, with prosecution discontinued and one foreign civil claim for damages successfully struck from court proceedings.
5.2 Economic contributions by SAA
SAA played a key role in the economy, and the contribution included the following:
SAA contributed R23.4 billion to GDP (in addition to the R50.9 billion in other sectors).
SAA created 116 000 tourism jobs (in addition to the 227 000 created in other sectors).
SAA carried approximately 50% of inbound passengers, and as a result made a contribution to GDP of R11.7 billion and supported 58 000 South African jobs.
5.3 Challenges facing SAA
The global economic climate had an adverse effect on the aviation industry, which included the following:
Low GDP growth meant static passenger and cargo demands
Economy traffic had still not fully recovered from the global financial crisis
Further downward pressure on average fares
Oil prices steadily moved above USD 100 per barrel
Rapidly increasing competition from Middle Eastern airlines
SAA had not grown its business or fleet for a long period.
5.4 Committees observations
The Committee commended SAA for the success with its turnaround of SAA Technical and for launching the pilot programme.
Clarity was sought on the number of aircraft that SAA owned, what its relationship was with pilots and where SAA sourced its pilots.
Concern was raised at the prevalence of baggage pilferage. What was being done to curb it?
Would Santaco have any adverse impact on the Mango routes? What kind of support did SAA give to Mango and was Mango sustainable?
How was Mango performing on the Durban to Cape Town route and did it not lose out to competitors?
What legacy issues were still outstanding, including Com-Air, and what were the challenges facing the board?
Would the entity be able to clear its debt completely? What did SAA do with the profits and did it have problems with hedging?
Did the entity enjoy any support from embassies for marketing?
Did SAA explore international routes such as Cape Town to Rio de Janeiro ?
Concern was raised about securing the air service licence as reported in the annual report. A progress report was sought on the KPMG report.
How did the remuneration of SAA staff compare with other airlines?
How visible and accessible was the leadership of SAA, and how would that improve going forward?
5.5 Responses
In response, the Committee was informed that:
SAAs management had worked very hard to improve staff morale. The CEO and the Chairperson of the board had visited all units to build good relationships with staff.
There was a service level agreement with Airports Company South Africa to tackle the problem of baggage pilferage.
SAA had managed to recover millions of rand through the Asset Forfeiture Unit from those implicated in corruption cases. Criminal and civil cases were underway.
Mango was 100% SAA owned, but was managed independently. The entity was profitable and sustainable. SAA negotiated and purchased fuel on behalf of Mango.
Santaco was not a threat to Mango as it did not operate on the same routes as Mango.
There was a joint forum with Armscor, SA Airforce, SA Express and Denel to respond to the new growth path and produce scarce technical skills.
There was co-operation between state-owned companies (SOCs) in terms of using facilities for training for the industry.
The SAA board had subcommittees that were functional. One of the subcommittees dealt specifically with compliance.
SAA leased 44 aircraft and owned seven aircraft for which it was still paying. It had a net asset value of R2.9 billion.
Baggage pilferage had a negative effect on the financial performance of the entity. Baggage pilferage had declined by 59% on domestic flights but had increased on regional flights at OR Tambo. A campaign called Project Zero, involving ACSA, law enforcement agencies and employees, was launched to deal with baggage pilferage.
Profits of the entity were used to strengthen the balance sheet and repay debts.
Since the release of the annual report, SAA had since secured the air service licence.
Each board member chaired a subcommittee and spent at least one day a week at the SAA office.
SAA paid better salaries with benefits compared to other airlines and regarded itself as the best paying airline in the industry.
The only civil claim outstanding was the Com-Air litigation case.
The R85 million irregular expenditure reported was due to a lack of timeous conclusion of valid contracts and did not relate to misconduct. Furthermore, the fruitless and wasteful expenditure of R2 million was due to late payments.
The Committee commended SAA for the swift manner in which it dealt with fraud and corruption cases and vowed to work with SAA to ensure the financial sustainability of the entity.
6. ANNUAL REPORT OF INFRACO
The delegation of Infraco comprised the following persons: Mr M Ngcobo (Chairperson), Dr A Shaw (Acting CEO), Ms R Magoele (CFO), Mr A Kamungoma (Acting DDG: Investment Portfolio, DPE), Ms M Mokholo (DDG: Legal and Governance, DPE).
6.1 Performance of the entity
The entity had managed to achieve a number of successes in 2010/11, which included the following:
6.1.1 Achievements
Launched to the broader telecoms market in November 2010
Five new open access long-distance Points of Presence (PoP) in KwaZulu-Natal , Western Cape and Gauteng
Three customers signed on and piloting was at the time being conducted by all major telecom providers
Expanded fibre optic cable footprint to 13 250km
Establishment of an in-house maintenance and operations department
International connectivity: continued participation in West Africa Cable System WACS with a 5.12 terabit capacity
Staff complement increased from 67 to 156.
6.1.2 Financial performance
For the year under review Broadband Infraco posted a loss of R206.9 million. Revenue decreased from R306.4 million in 2010 to R297 million in the financial year under review. The companys total equity and liabilities remained at R1.7 billion. Operating expenditure decreased from R102.3 million in 2010 to R26 million in 2011, whilst investment expenditure increased from R245.3 million in 2010 to R536 million in 2011. Financing activities decreased from R281 million in 2010 to R187.2 million in 2011. Internal control weaknesses were identified, with the majority of these now addressed.
6.1.3 Human resources and skills development
The entity had a staff complement of 156 permanent employees by end of March 2011. The company, through its recruitment policies and procedures, promoted employment equity. Its racial and gender equity appointments equalled 87% Black and 35% women respectively by the end of the financial year. Permanent appointments were made in areas of sales, network engineering, capital projects, human resources and enterprises risk management. Strides were made in human capital development in the reporting period with regard to informal training. The entity spent 3% on skills development, exceeding the minimum 1% required by the Skills Development Act.
6.2 Actions taken to address governance shortcomings
Disciplinary action against six implicated staff for irregularities as identified by internal audit reports in respect of irregular procurement practices relating to fibre optic installation contracts presented to the company in November 2010.
As a consequence of various audits, procurement systems, processes and document control have been substantially strengthened, new supply chain policies and procedures have been developed and a framework agreement for compliance with the Construction Industry Board (CIBD) has been implemented.
Contract management processes have been strengthened and further improvements were underway to meet the capital project implementation recommendations made by the internal auditors.
All contractor payments within finance were now based on the three-way matching principle which includes purchase orders, invoices and goods receipt notes together with documented proof of investment decisions based on improved delegations of authority. The issuing of purchase orders is now also effectively regulated.
All Declarations of Interest within the company, including those of the board, the executive and managers, have been updated.
As a result of the qualification to the 2010/11 audit, no bonuses had been paid to any staff member.
A new corporate plan was developed and submitted at the end of June 2011. The shareholder had subsequently approved the new plan, which identified a number of actions to turn the company around and ensure future sustainability. These included a new set of market-related value propositions, a re-assessment of the future product portfolio and an re-aligned organisation structure.
HR PAYE payment procedures have been improved to avoid the previous payment of penalties to SARS.
A proper payroll claims process had been set in motion. New leave from processes were in place and there was proper access control to the building.
Procurement tracking and reporting tools have been created.
An IT system review procedure has been developed, effective back-ups were available and were also stored off site. IT security has been substantially improved.
Four new executive managers have been appointed, namely a new Chief Financial Manager, a Chief Technical Officer, an executive responsible for Governance and a head of the Capital Investment Programme.
6.3 Primary focus areas going forward
The entity had identified three focus areas which related to services, financials and internal processes to improve the company, which comprised the following:
Retain existing customers and attract new clients through enhanced service.
Improve Earnings Before Interest, Taxes, Depreciation and Amortization EBITDA margin by focussing on improving operational efficiencies.
Enhance capital programme roll out and manage capital expenditure to revenue.
Expand network, improve services and collaborate with customers in order to improve value proposition.
Pilot projects: micro telecoms model for underserviced areas.
Achieve enhanced Southern African regional connectivity.
Alignment and collaboration with Sentech.
Introduce international services when WACS goes live in 2012.
Improve compliance with the PFMA and National Treasury regulations.
Continued focus on human capital development.
Strategically re-align the organisation to the changing needs of the market.
6.4 Committees observations
The Committee made the following observations:
Commended the leadership for the swift action taken against those implicated, and sought clarity whether the entity had recovered any of the stolen money.
Whether there were employees among those who had resigned or had been dismissed who still benefited from contracts with the entity ?
What was the role of the board in dealing with corruption? Was the board not aware of such acts in the entity ?
What was the Department of Public Enterprises doing to ensure that entities were conscious of the PFMA obligations and complied with such oblications ?
Concern raised about poor attendance at board meetings and the procurement committee not having convened a meeting for the year under review.
Clarity sought on the impact of the absence of the electronic communication services licence.
Clarity sought on the findings of the Auditor-General on fruitless and wasteful expenditure, and audit queries.
How did the Department not pick up the absence and non-compliance of policies at Infraco ?
6.5 Responses
In response the acting CEO informed the Committee that he would not be able to give a full account of the events as he was working in the Department at the time mismanagement occurred. However he responded as follows to questions raised:
He had a difficult time initiating disciplinary disciplinary action against offenders, but had support from the new leadership. The disciplinary hearings were PFMA and governance compliance related. A change management process was instituted to improve the morale of staff.
It would take the entity four to five years to return to profitability. A forensic investigation had been instituted and Delloite & Touche would report to the entity at the end of December 2011.
No staff member had received a performance bonus, and this affected their morale but there was a need to reward innocent and loyal staff members.
In January 2012, Infraco would enter into a commercial relationship with Neotel.
The ECS licence was vital in enabling the entity to supply connectivity to schools, hospitals, clinics and impoverished communities.
The Auditor-General could not find sufficient documentation to verify whether all procurement procedures had been followed.
The entity constantly received calls from suppliers claiming outstanding payments, and there was no supporting documents to verify debts.
Dr C Forlee (DPE) informed the Committee that the Department would be training all Infraco employees on regulatory frameworks. Most of the policies at Infraco were imported from Eskom and had loopholes. An inter-ministerial forum had been established to focus on Broadband and the role of Infraco. Furthermore an investigation was underway on the possibilities of merging with Sentech.
6.6 Conclusions
The Committee commended the employees of Infraco who were hard working and loyal, and pledged its support to the management of the entity to ensure a successful turnaround of the entity. It resolved that it would have quarterly interactions with Infraco and would undertake an oversight visit to the entity at the end of November 2011. It further resolved to have quarterly interactions with the entity to monitor the financial control systems.
7. ANNUAL REPORT OF ALEXKOR
The delegation of Alexkor comprised the following persons: Mr R Muzariri (Chairperson), Mr R Paul (Non-Executive Director), Mr B Lategan (Acting CEO), Ms N Mxunyelwa (Acting Company Secretary) and Mr W Diergaadt (Pooling and Sharing Joint Venture (PSJV)).
7.1 Performance of the entity
For the period under review, the entity registered the following successes:
7.1.1 Financial performance
Alexkor posted a net profit of R84.2 million and an operating profit of R11.3 million - the first operating profit since 2006.
Production rose by 20% (this should be seen in the context of curtailed land mining as a result of the anticipated pooling and sharing joint venture (PSJV) with the Richtersveld community.
The increased production, coupled with better diamond prices, helped Alexkor achieve a gross revenue of R195.9 million from diamond sales, compared to R163.9 million in 2010.
Diamond sales for the year equalled R195.9m (2010: R163.9 million). The increase of 19.5%, was due to the increase in carat production of 37 794 carats, compared to a budgeted production of 31 425 carats.
7.1.2 Human resources
Alexkor had a total workforce of 975 employees of whome 106 were on Alexkors payroll whilst 869 were on contractors payrolls. With a small staff complement of 106 Alexkors employment profile showed a highly male-dominated workforce profile. Almost 93% (95) of Alexkors staff were males whereas women constituted only about 7% (11).
7.1.3 Implementation of deeds of settlement with Richtersveld community
All the suspensive conditions of the Pooling and Sharing Joint Venture (PSJV) were met.
The Deed of Settlement (DoS) signed between Alexkor, the state and the Richtersveld community in 2007 envisaged the establishment of the PSJV with the community, in which the land mining rights would be ceded to the community, while Alexkor would continue to hold the marine mining rights.
The DoS required the conversion of old order land and marine mining rights. On 28 January 2010, the application for conversion of old order land mining rights was granted and subsequently executed on 19 May 2010.
The conversion of the marine mining rights was also granted and executed on 2 July 2010.
Land mining rights were ceded to the community on 28 March 2011 and registered on 6 April 2011.
The PSJV with the Richtersveld community was established on 7 April 2011.
7.1.4 Progress on the township upgrade
Phase one of the township upgrade project, consisting of a water network, sewerage network, storm water control network, solid waste disposal and road works, was 75% complete by the financial year end.
The tender for phase two, namely the electrical reticulation upgrade project, was awarded in December 2010, with the contractor establishing the site in March 2011.
The phase three tender for the mechanical and electrical pumping equipment was awarded in February 2011.
Phase four relating to the waste water treatment works was at the environmental impact assessment (EIA) stage at financial year end because of some delays due to intersecting of bedrock.
The final estimated completion date for the entire project was 30 June 2012.
The total project expenditure at project completion was estimated at R110 million.
To boost production in December 2009, and following consultations with the Richtersveld community, Alexkor decided to invite suitable, interested parties to express an interest as contractors in mining the deep sea, middle sea, shallow water, beach and the curtailed areas of land mining. This was done through a rigorous tender process.
7.2 Committees observations
The Committee made the following observations:
Concern was raised at the high number of acting executives. Why was there a steep increase in executive remuneration?
What plans were in place to replace ageing fleet and machinery?
Were there any plans to explore mining in the Orange River and neighbouring countries?
What action would be taken to address the queries raised by the Auditor-General?
Clarity was sought on why the cost of royalties had decreased, and why was the salary of the Mine Manager reflected under deeds of settlement?
Concern was expressed about the emphasis of matter raised by the Auditor-General. What would be done to address those matters?
7.3 Responses
In response, the Chairperson of the board stated the following:
Mr Mike Mpanza was appointed in April 2010 as the new Mine Manager, hence there was an increase in salary. There were processes underway to fill the other vacant posts. Mr Wiaan Basson, General Manager for operations was a contractor reporting to the board of the PSJV.
The PSJV was focused on developing a new diamond mining strategy, and work was underway to see how the new state-owned mining company could work with Alexkor.
There was one doctor on site for occupational health and safety reasons.
The Northern Cape provincial government had not yet taken over the schools, hospital and services.
Higher-grade diamonds had been exhausted and the production had decreased from 1 000 000 carats in 1960s to 35 000 in 2011.
The PSJV would begin exploration in June 2012. It would take six months in order to identify land to mine. In the last financial year Alexkor used to charge 4% royalties on diamonds, but now charged 0.4% as per the new formula developed by National Treasury.
Alexkor was facing insolvency after effecting transfers to the Community and was in need of recapitalisation.
7.4 Conclusions
The Committee resolved that information be submitted to it on diamond theft cases, investigations and the rate of prosecution.
8. ANNUAL REPORT OF SAFCOL
The delegation of Safcol comprised the following persons: Ms N Magwentsu (Chairperson), Ms M Manyama-Matome (Acting CEO) and Hon BAD Martins (Deputy Minister of Public Enterprises)
8.1 Performance of the entity
The main focus of Safcol was on the management of stateowned commercial plantations and performance of Komatiland Forests (Pty) Ltd, Floma, Mountains to Oceans, Kamhlabane Timber and Temba Timber. The major subsidiary was Komatiland Forests (Pty) Ltd (KLF) which consisted of a forests business unit, research centre, nursery, and processing plants.
8.1.1 Financial and commercial sustainability
Safcol received an unqualified audit opinion. It reported an increase in sales levels but a loss before tax of R101 million, a reduction on the previous years loss of R588.9 million. Return on equity was -5% for the year, an improvement on the previous years -18.5% return on equity. Negative year-end cash flows were reported for the year.
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8.1.2 Human resources
Both Safcol and Komatiland Forests (Pty) Ltd (KLF) were awarded Level 2 Broad-Based Black Economic Empowerment (BBBEE) contributor status for the year. Safcol improved on its employment equity status, particularly with regard to disabled employees and the number of black managers at senior and middle management levels. The Safcol board was reconstituted and subcommittees were restructured during the financial year. Safcols terms of reference had also been reviewed and updated to fall in line with Marvin King report on governence.
8.1.3 Challenges facing the entity
There were some major risks facing Safcol. The first related to the potential land claims on 61% of the land on which Safcol operated, which could have a significant effect on its operations after the land claims were finalised. There was also a damages claim against Safcol and government of R3.2 billion, which had been lodged after the decision taken by government to put the privatisation process on hold in 2009. Key individuals who dealt with the case were no longer working at Safcol.
8.2 Committees observations
The Committee made the following observations:
Whether the land claims had any effect with the relationship with the community.
Concern was expressed regarding the low representivity of women in the entity.
The entity should explore expanding the range of products and finding new markets.
Were there any strategies to co-partner with communities in order to minimise land claims?
Why was Safcol not partnering with the Department of Human Settlements to supply wood for wooden houses?
Why was the pace so slow in the resolution of land claims?
Clarity was sought on the former CEOs departure?
8.3 Responses
In response, the CEO informed the Committee that social compacts had been signed with the community to improve relations. There were joint community forums that met regularly to identify projects for the community.
She further responded as follows:
The decision not to privatise had impacted the entity negatively because it created uncertainty on the future of the entity.
The cost structure of Safcol was too high for the revenue of Safcol.
Cabinet was yet to approve a policy on the participation in commercial projects.
The former CEO had a negotiated settlement due to a breakdown in relationship. He was paid an annual salary and had since challenged the entity for a bonus and benefits. The matter was in the roll call for arbitration.
There were no increases and bonuses for exco members for 2010/11.
Safcol had constructed timber frames structures for schools, clinics and other developmental projects.
The Department of Public Enterprises (DPE) informed the Committee that it was engaging the Department of Rural Development and Land Reform, which had proposed the appointment of a private company to manage the shares on behalf of the community. DPE was playing a coordination role to ensure that the land claims were resolved swiftly.
8.4 Conclusions
The Committee resolved that the Department of Public Enterprises would need to brief the Committee on the future of Safcol, and on progress regarding the land claims cases. The Committee further resolved to undertake an oversight visit to Safcol at the end of November 2011.
9. ANNUAL REPORT OF TRANSNET
Transnet signed a performance agreement with the shareholder regarding the entitys targets for the 2010/11 financial year. The entity had not met some of its targets due to the three week-long industrial strike actions that took place May 2010.
9.1 Performance of the entity
Below is a summary of the performance of the entity per different divisions:
9.1.1 Freight Rail
On operational efficiency, Transnets general freight business could not achieve its targets, especially on coal and iron ore exports. On safety, the divisions on both employee fatalities and public fatalities did not achieve their target of zero tolerance as eight employee fatalities and 138 public fatalities were recorded.
9.1.2 Rail Engineering
The division had met most of its targets on operational efficiency, infrastructure and human capital. The division had, however, failed to meet its targets on Broad-Based Black Economic Empowerment (reaching 44 instead of the targeted 80 on BBBEE procurement) as well as on employment equity as it managed to reach 74,4% out of a target of 78.0%. On safety, the division recorded 128 safety incidents out of a target of 114 with one employee fatality.
9.1.3 National Ports Authority
The divisions overall performance showed improvement compared to the previous financial year, and almost all the targets were met except for the expenditure on capital investment of about R2 billion, which was less than the R3.4 billion target agreed upon with the shareholder. There were no employee or public fatalities and only 32 recorded disabling injuries this was an achievement as the entity was expected to record no more than 40 in terms of targets.
9.1.4 Ports Terminals
Performance by the National Ports Authority increased due to the division meeting most of its targets. Similar to the National Ports Authority division, the Port Terminals division on capital investment (infrastructure) spent R866 million, which was less than the targeted R1.3 billion. On safety, there were 1 436 reported incidents of safety and one employee fatality. Safety seemed to have been a challenge for almost all the Transnet divisions.
9.1.5 Pipelines
The pipeline division met all of its targets except slight production interruption, which might have had a negative impact on the divisions overall performance. There were no reported employee and public fatalities. There were, however, 76 reported safety incidents and in terms of the target this was an achievement as safety incidents were not expected to be more than 86. On electricity consumption, the Group failed to meet its target of 218 719 Giga-Watts but instead recorded 236 117 GWatts of electricity consumption.
9.2 Financial performance
Transnets revenue for the year ended 31 March 2011 had increased from R35.6 billion to R37.9 billion. The increase in revenue was attributed to an increase in volumes during the year and an effective yield and mix management programme, despite a protracted industrial strike action during May 2010. Performance improved for four divisions compared to the previous financial year except for the pipeline division whose revenue decreased by 3,6% to R1.13 billion from R1.17 billion. The Group made a profit of R4.1 billion, and in the same year government had guaranteed certain borrowings for Transnet to the amount of R9.5 billion.
The auditing firm, however, drew attention to the following three aspects, namely procurement, contract and expenditure, that were in contravention of the laws and regulations (Public Finance Management Act 1 of 1999) of state companies and institutions, which were as follows:
(1) Fruitless and wasteful expenditure of R36 million on the procurement of a pneumatic ship unloader.
(2) Irregular expenditure of R8.5 billion relating to four contracts for:
The provision of Engineering, Procurement and Contract Management (EPCM) services on capital projects;
The supply of 32 Rubber Tyred Gantry (RTG) cranes;
The accommodation of staff; and
The supply of rails.
9.3 Human Resources
Transnet had a total workforce of 49 078 employees consisting of 47 763 permanent employees and 1 315 fixed-term contract employees. In terms of employment equity, African employees represented 62% of Transnets workforce, while Indians and Coloureds represented 4% and 10% respectively. Whites in the company represented 24% of Transnets workforce. In terms of gender, male representation at Transnet stood at 80% and females at 20%. The Group recognised the under-representation of females and its poor performance on people with disabilities (0,8% representation) as a challenge, which has been taken up as part of the entitys Employment Equity Plan.
9.4 Committees observations
The Committee made the following observations:
Concern was raised at the high prevalence of corruption, and clarity was sought on where it was more prevalent.
Clarity was sought on the bonuses paid to Mr Gama and other executives.
Serious concern was raised about the irregular expenditure of R8.5 billion and clarity was sought on the action taken.
Why was Transnet not adhering to the report of the Committee on the Transnet Second Defined Benefit Fund?
When would the new multipurpose pipeline be completed? Concern was raised regarding the escalating costs.
When did Transnet pay out bonuses, and what formula was used in relation to performance targets?
What progress was made to remove trucks from the roads and what plans were in place?
Were disciplinary actions initiated against employees who had been implicated in irregular, fruitless and wasteful expenditure?
Concern was expressed at the performance regarding on-time arrival and departure of frieght trains and the money it had cost the entity. What measures were taken to rectify the situation?
What was done to address the shortage of train drivers and to fill vacancies within the entity, especially the CFO?
Concern was raised about internal and external auditors being unable to pick up irregularities.
Clarity was sought on the debt that the Passenger Rail Agency of South Africa owed Transnet.
9.5 Responses
In response, the CEO accounted as follows:
Transnet hoped to report an improvement on mid-term results regarding moving trucks to rail.
There was a fraud working committee in every division that was managed by Delloite & Touche.
The R8.5 billion irregular expenditure related to four project management and construction contracts that were entered into in 2004/5, where there was an absence of internal control systems and the PFMA. Action taken included a provision where only the Group CEO could sign condonements as of March 2011.
Regarding bonus payments, when the remuneration committee recommended a bonus, the company reserved the money for three years and paid out a lump sum at the end of the third year. The amount that was paid to Mr Gama was for the years he worked before he was suspended.
The trustees of the TSDBF were the only people who could change the rules of the fund; the trustees have been tasked to present a way forward on the fund.
Transnet was in the process of training 1 125 train drivers.
Discussions were underway to fill the position of CFO.
Transnet contemplated having scanners for all containers leaving the country to detect copper that had been stolen.
The board of Transnet was reviewing the incentive scheme to ensure transparency and consistency.
9.6 Conclusion and recommendation
The Committee resolved that Transnet should provide the Committee with the incentive review report. It further resolved that Standing Committee on Public Accounts (Scopa) should investigate the R8.5 billion irregular expenditure reported at Transnet.
10. ANNUAL REPORT OF SOUTH AFRICAN EXPRESS AIRWAYS (SAX)
The delegation of SAX comprised Ms L Boyle (Chairperson), Mr I Ntshanga (CEO), Mr V Matsotso (Non-Executive Director), Ms A Ntsho (Company Secretary) and Ms R Lepule (DDG: Transport, DPE).
10.1 Performance of the entity
The performance of the entity was presented as follows:
10.1.1 Financial performance
The airlines revenue for the financial year under review was R1.642 billion, marginally up by 2% compared to the previous financial year where revenue was R1.612 billion. The impairment of debt extended to Congo Express, amounting to R35 million, had a material impact on the final results of the company, and other major impacts related to the unavailability of two aircraft and the loss of market share on regional routes such as Gaborone. The airlines reported profit for the year was R51.3 million and was down by more than 70% compared to the R250 million profit reported in the previous financial year.
The airline managed to make a profit of R250 million in the 2009/10 financial year during the global downturn but this went down to R51,3 million in the 2010/11 financial year despite the returns from hosting the 2010 World Cup. It might have been reasonable for the shareholder (Government) to expect more profit due to the hosting of the 2010 World Cup. The reduction in profit needed to be explained. Importantly also SAX failed to provide the auditor with evidence of the evaluation of the companys share of unrecognised losses in its associate and whether such unrecognised losses had a material impact on the airlines overall results for the year under review need some clarification.
10.1.2 Human resources
SAX had a total of 1 026 employees compared to 931 employees the previous financial year. A breakdown of the airlines staff profile in terms of employment equity revealed an amount of 43% (40% in 2010) white employees compared to 57% (60% in 2010) black employees, with a gender profile of 36% (38% in 2010) female and 62% (64% in 2010) male. A breakdown of group statistics (e.g African, Coloureds. Indians, etc) in terms of gender had not been provided and made it difficult to assess gender equity between and within groups. The auditor was unable to obtain sufficient and appropriate audit evidence as to the evaluation of the companys share of unrecognised losses, hence the entity received a qualified audit report.
10.1.3 Forensic investigation
The Committee was informed that SAXs Ethics Hotline had received an anonymous call with allegations of irregularities in its annual financial statements. The allegations were material and, if substantiated, could negatively impact SAXs audited financial statements. The allegations included R42 million of VAT shown as a debtor by SAX but which may not be fully recoverable from the South African Revenue Service (SARS). SAX undertook to keep the Committee informed of the forensic audit outcomes. In addition, an amount of R16 million had been reported in trade receivables despite indications that the amount may not be recoverable. The findings of the forensic audit investigation would be reported to the board, and SAX would keep the Committee informed of developments.
10.2 Committees observations
The Committee made the following observations:
Concern was expressed at how the entity would recover money lost in the DRC. Was a risk assessment conducted before the entity explored that market? Has the entity proceeded with legal processes in that regard?
Clarity was sought on when the forensic investigation began, and whether there were internal control measures in place.
A proposal was made that the entity should consider a coding system in order to track lost baggage and improve baggage safety.
Concern was raised regarding the non-achievement of key performance indicators.
Concern was raised about the low job targets achieved and the low representation of people with disabilities.
10.3 Responses
Ms Boyle informed the Committee that the forensic investigation started in September 2011, as it was only discovered and reported then. She further stated the following in response to questions asked:
The corruption was reported by a whistleblower. Internal auditors reported that there was no irregularity in the finances. The Committee was informed that the board would take action against those who were implicated and that the report will be out in three weeks.
SAX was using lawyers from the DRC to recover the costs, and the process was underway.
Recruitment of people with disabilities was a challenge, but employment increased by 6% in the first six months.
Internal audit functions were outsourced to KPMG, which reported quarterly and could not determine the quantum of the losses incurred in the Congo Express deal, but that it was not due to internal control deficiencies.
No performance bonuses were paid in 2010/11, and the assurance was given that there were no disturbances due to the fuel shortage.
The Deputy Minister informed the Committee that there was a need for the Department to come back and brief the Committee on issues that emanated from the annual reports and actions that the Department had taken.
The DDG for Transport informed the Committee that the Department would await the forensic report and would act on the findings. She expressed concern that SAX would not be able to support the fleet renewal programme. The Department would have monthly meetings with the entity to improve the oversight work.
10.4 Conclusion and recommendation
The Committee resolved that SA Express Airways should send a report on the forensic investigation into irregular expenditure to the Committee by 30 November 2011. It further resolved to have quarterly interactions with the entity to monitor the financial control systems.
Report to be considered.
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