ATC120829: Report of the Portfolio Committee on Public Enterprises on the oversight visit to state-owned companies, dated 28 August 2012

Public Enterprises

Oversight visit to South African Airways (SAA) and Airport Company of South Africa (ACSA)

Report of the Portfolio Committee on Public Enterprises on the oversight visit to state-owned companies, dated 28 August 2012

1. Introduction

The Portfolio Committee on Public Enterprises (the committee) undertook an oversight visit to Eskom’s power stations, namely Duvha, Medupi, Kusile (the latter two still under construction). This included an oversight visit to the South African Express Airways (SAX) offices in Johannesburg as well as a briefing by the board of trustees of the Transnet Second Defined Benefit Fund and the Transnet Pension Fund. The visit took place from 5 th to 8 th of June 2012.

The main purpose of the visit was to assess the progress made in the construction of the two power stations, Kusile and Medupi. This included an assessment of the impact the construction has on the immediate communities around the power stations. Key focus areas included job creation, skills development, promotion of local businesses and localisation.

Furthermore the committee’s visit was aimed at interacting with the board of directors of South African Express Airways in order to understand the challenges facing the company and the progress made so far in improving the situation, especially the incident of the withdrawal of the entity’s financial statements, and weak internal controls among other challenges.

1.1 Delegation

The committee delegation included the following members: Mr Peter Maluleka (Chairperson of the Committee, ANC), Mr C Gololo (ANC), Dr GW Koornhof (ANC), Miss C September (ANC), Hon GM Borman (ANC), Mr A Mokoena (ANC), Mr R Sonto (ANC), Ms N Michael (DA), Mr E Marais (DA) and Mr J Dikobo (Azapo). The delegation was accompanied by the following parliamentary officials: Mr D Mocumi (Committee Secretary), Mr G Mankay (Committee Assistant) and Mr E Boskati (Researcher).

2. Visit to Medupi power station (Lephalale)

The Portfolio Committee was welcomed by Eskom’s Project Manager, and in his welcoming address he conveyed the apologies of the Group Chief Executive Officer, Mr Brian Dames. Among those who welcomed the Portfolio Committee was the Mayor of Lephalale, traditional leaders from the region, representatives of local businesses and organised labour.

2.1 Overview of the Medupi project

The Committee was informed that the construction of the Medupi power station was on track, and that the project was within schedule. It will be completed in December 2013. Coal supply for the power station will be supplied by Exxaro. Medupi has a capacity of storing about 2 million tonnes of coal that could last for 40 days.

2. 2 Interaction with stakeholders

The interaction with stakeholders revealed a lack of communication from the side of Eskom to all the stakeholders. Stakeholders (Mayor, Traditional Leaders and the business community) complained about the non involvement of their communities, whilst the local business community pointed out that they were not benefitting from the construction of the power station, as it is mainly big companies who are involved.

2.2.1 Job creation and skills development

All stakeholders raised concerns regarding the conditions of employment at Medupi power station. These included, subcontractors not adhering to labour legislation, workers being given rotten food, importation of foreign labour, and lack of employment for local young people. The Community was concerned that there was not enough done to ensure that subcontractors transfer skills to the local workers and majority of the local workers were employed as unskilled labour in the project. Contractors were using labour brokers and not paying decent wages. Eskom informed the Committee that 90% of workers were from South Africa and 48% were from within 70km radius of the Lephalale area. Hitachi and Siemens have invested in local training colleges in order to produce the required skills for the project. The challenge remained the shortage of welders, as the project required 55 000 specialist welders.

2.2.2 Promotion of local small and medium businesses

Eskom informed the Committee that 64% of the R51bn was spent locally. There was a project labour agreement with the contractors which made provision for a bargaining council between labourers and contractors. There were clear conditions on the contracts with companies with regard to localisation. The contractors were responsible for the working conditions and grievances of workers as per the project labour agreement.

Representatives of local business complained that contractors such as Murray & Roberts were frustrating local businesses and subcontractors were not paid on time. There were no concrete programmes for supplier and enterprise development and support for emerging local businesses. There were 38 contractors on site, and out of eleven sectors, only one contract of catering was awarded to the local community.

2.2.3 Community involvement and development

Traditional leaders raised concerns that Eskom had promised in 2009 to assist by way of investing in education, health, housing and the refurbishing of community halls, but that has not been done. The municipality also raised concerns that the community was frustrated because they were left out of the project, and that the project had no meaningful spin offs and impact in their lives.

Eskom had opened 6 Central Information Management Offices around Lephalale, where information regarding developmental and business opportunities is distributed. There was decent housing provided to 4 workers per communal unit. The community however raised concern regarding corrupt activities involving employees who worked in the centres, that they sold employment to rural youth for R1500. Four workers have since been dismissed for corrupt behaviour.

2.3 Conclusions and Recommendations

The Committee resolved that: (1) Eskom should not give contracts to companies that do not adhere to labour legislation and treat workers as sub-human beings. It was ultimately responsible for the workers employed by the contractors, because Eskom is the custodian of the project. (2) Eskom should improve the participation and empowerment of women and people with disabilities. (3) Eskom should expand its skills development to professions which are needed by society such as doctors, social workers, and not only skills for the economic market.

It further recommended that Eskom should convene a stakeholder forum with representatives of local business, organised labour and the local authority and develop a joint proposal on how to respond to the concerns of the community and workers. A report should be forwarded to the Portfolio committee within 3 months after the tabling of this report in Parliament. Eskom should review the project labour agreement as the interpretation was not clear to the parties concerned. The communication strategy of Eskom and its interface with the community should be improved.

3. Visit to Kusile power station

At Kusile power station the Portfolio Committee was welcomed by the General Manager for corporate Affairs, Mr Chose Choeu and The Group CEO, Mr Brian Dames. The Committee met with the representatives from the Mayoral Committee, the provincial Department of Economic Development, members of the community as well as representatives of local businesses and organised labour.

3.1 Overview of Kusile project

The construction of Kusile started in April 2008, and it was 20% complete and the Committee was informed that the project was within schedule. There were 90 contractors on site and Eskom constructed the road that link to the N4 road to create access to the plant. There had only been 3 fatalities since the beginning of the project. Coal will be supplied by Anglo Coal, and the conveyer belts will only be commissioned once the project was complete. The Committee was assured that there were systems in place to ensure that the cost of the project would not escalate.

3.2 Interaction with stakeholders

The Committee engaged with all stakeholders to find out whether the construction of the power station was yielding the expected results and had the expected impact on communities. There were forums in place to ensure public participation but that was not enough as challenges of consultation were raised by all stakeholders.

3.2.1 Job creation and skills development

Organised labour raised concerns regarding poor communication from the managers and lack of consultation on issues affecting workers. Contractors were not adhering to labour legislation and that there was a need to train workers on their rights and contractors on their social obligations in terms of the labour agreement. A high number of young people have been dismissed for ill discipline because of lack of induction and orientation on the code of conduct. The Municipality commended Eskom for employing the people of Emalahleni but concern was raised regarding lack of benefits for the people of Delmas.

Eskom has ensured that there are employment contracts in place with all contractors and that there were labour relations specialists on site for any labour disputes. Furthermore, there were programmes in place to ensure that there was skills transfer taking place and training and bursaries were afforded to young people in the area to ensure the supply of required skills to sustain the power station upon completion.

3.2.2 Promotion of local small and medium businesses

Eskom has a partnership with the University of Limpopo to host the contractors academy. It has developed a database of all local businesses that have benefited from the project and has tried to customise tenders to advantage local business.

The provincial Department of Economic Development informed the committee that they had a good relationship with Eskom and received regular reports on progress regarding economic development. They commended Eskom for the supplier development programme and for the workshops that have been held to create awareness regarding the opportunities that existed for the broader community.

Local business admitted that they were not ready for the construction and the opportunities. They raised concern regarding the Construction Industry Development Board grading, and said that it disadvantaged local businesses from getting tenders. There was no support for women who are in business and proposed that the training for women in engineering business should increase significantly.

3.2.3 Community involvement and development

For the construction of the power station, Eskom bought a farm and relocated 18 families. The construction of the power station had revived economic activities in the community and has brought stability. The community appreciated the efforts by Eskom to reach out and create awareness, and believed that more could be done to capacitate young people with skills and support to businesses.

3.3 Conclusions and Recommendations

The Committee resolved that:

(1) Eskom should convene a stakeholder forum that will comprise of all concerned parties and should develop a joint proposal on how to address the concerns raised by the community.

(2) Eskom should ensure that the subcontractors are paid on time and are given the necessary support and training.

(3) Eskom should ensure that all contractors have corporate social investment projects especially in education and health.

4 Visit to Duvha power station

The delegation of Eskom was led by the General Manager for Corporate Affairs, Mr Chose Choeu and Mr Christo Van Niekerk, Senior General Manager for Generation Division. The Committee only met with organised labour, and was informed that because the power station was in the same municipality with Kusile, stakeholders did not attend the session at Duvha. The Committee also undertook a site tour of the power station to familiarise itself with the plant and the conditions of workers.

4.1 Overview of Duvha power station

The power station was commissioned between November 1975 and February 1984, and planned to operate until 2044. There were currently 26 units in the maintenance backlog and the target was to eliminate backlog by end 2013. Eskom was using open cycle gas turbines (OCGT) designed as peaking power and emergency reserves. They are diesel-fired and cost 10-15 times much more than coal-fired stations. OCGT usage has increased in 2011 and 2012 in order to create space for maintenance.

4.2 Briefing on accident (explosion of Turbo Generator)

The committee was briefed on the incident that took place on 9 February 2011, where the Unit 4 turbo generator at Duvha Power Station destructed during an annual statutory overspeed test. The purpose of the test was to check the integrity of the mechanical trip mechanism which should shut off the steam supply and prevent

the turbine exceeding its safe speed limit. The mechanical trip mechanism failed to operate during the test. The electro-hydraulic governor failed to impose the safe speed limit. Due to the rapid acceleration rate allowed by the modification, the operators only had seconds in which to activate the emergency push buttons near the front pedestal and in the control room when the turbine exceeded 3 500 rpm. The unit destructed at about 4 100 rpm. Large parts of the machine such as bearing pedestals, shaft couplings and turbine blades were ejected. There were no physical injuries to staff. A fire broke out in the area between the intermediate pressure (IP)

cylinder and the front pedestal, but it was effectively dealt with.

An investigation was conducted and the findings showed that the direct cause of the incident was attributed to an operating error, in that the operator did not follow the set procedure while undertaking the physical overspeed test. The investigation was conducted jointly with the insurance company, and the claim was R1.9bn, however the report was presented to all but was the property of the insurance company.

4.3 Interaction with organised labour

The Committee interacted with the union representatives, and these were the findings of the Committee:

4.3.1 Job creation and skills development

Organised labour informed the Committee that the contractors on site were exploiting workers and were not complying with labour legislation especially their contribution to the Unemployment Insurance Fund. There were no mechanisms in place to monitor the performance of contractors, no support was given to workers who got injured on duty. Money was deducted from employees salaries for protective clothing.

There were no training opportunities for the employees of Duvha power stations, and no skills transfer was taking place at the construction of unit 4. Instead pensioners were recycled to come and work as consultants in the company. Training that was conducted on site was not accredited and was not relevant. Labour raised concerns regarding the salary parities among workers and the absence of a performance management and appraisal system. There were no skills development and job creation initiatives to improve the lives of the adjacent communities.

4.3.2 Community involvement and development

There was lack of investment in the community and the furniture that was replaced by Eskom was not donated to organisations within the community. Concern was raised that Eskom has failed to uplift the community through recreation, education and skills development. The Committee raised concern with regard to the appalling conditions of the community, especially the state of houses.

Eskom informed the Committee that it could not invest in the adjacent community because the land adjacent to the plant which the community occupied was the property of Anglo American and there were discussions underway with the local municipality to develop the area .

4.4 Conclusions and Recommendations

The committee recommended that:

(1) Eskom should convene a stakeholder forum with representatives of local business, organised labour and the local authority and develop a joint proposal on how to respond to the concerns of the community and workers. A report should be forwarded to the Portfolio Committee within 3 months after the tabling of this report in Parliament.

(2) The committee further recommended that Eskom should develop a corporate social investment to address the issues of education, skills development and housing with the local authorities, labour and local businesses.

(3) It should make an effort to develop and support local suppliers in order to improve the local economy of the area.

5. Visit to South African Express Airways

The committee was welcomed by the Chairperson of the Board and the chief executive officer, Mr Inathi Ntshanga. The committee interacted with the employees of SAX and the customers at OR Tambo International Airport to establish the challenges facing the company and how the company could improve its customer service. The committee also visited the Denel Training Academy where SAX was conducting its skills development initiatives.

5.1 Interaction with staff

The Committee visited employees working at the counters at OR Tambo International Airport and they highlighted the following challenges: communication problem between frontline staff and the boarding gates, cancellation of flights and delays, overbooking of flights, lack of security for frontline staff (counters), change of sizes of carriers by flight controllers causing challenges to accommodate booked passengers. The customers raised concern regarding flight delays and cancellations, but were happy with the service etiquette of the employees.

5.2 Observations of the Committee

The Committee noted with concern that there was lack of support given to the employees, and that they were working under difficult conditions. They were not empowered with enough information to handle queries and frustrations of customers. The employees were very motivated and showed commitment and loyalty to the company.

5.3 Meeting with the board of directors

The Chairperson of the board, Ms Boyle, apologised for the board members who could not make it to the meeting. In the briefing she highlighted the following:

· There has been no change in the status quo of the 2010/11 financial statements, and the reconstruction thereof was still underway.

· Reassured the Committee that all the problems facing the entity were not related to fraud and corruption, but related to human oversight.

· The Company had appointed Sizwe Ntsaluba Gobodo and KPMG as external auditors, and it has reviewed the structure of the organisation and addressed the skills requirement. There were new control systems that have been introduced including, a new formula used to audit assets in order to prevent over-valuation or over-statement.

· Both internal and external auditors have given the audit committee assurance in writing that all internal controls were in place.

· In response to the problem of flight delays, she informed the Committee that the company had two aircrafts that were broken and the cleaning of aircrafts were the main reasons the company experienced flight delays.

In conclusion, the chairperson of the board told the Committee that the forensic report has been completed and has been submitted to the auditors for verification, thereafter it will be forwarded to the Minister then the Portfolio Committee.

5.4 Conclusion and Recommendations

The Committee expressed its discomfort with regard to the effectiveness of the board and governance of SAX and requested the board to be thorough in the execution of its duties, so that the incident of incorrect financial statements did not reoccur. It further resolved that SAX should address all the concerns that have been raised by the customers and employees and should improve its customer service. SAX should keep the Portfolio Committee informed timeously of the developments within the company.

6. Meeting with the Board of Trustees of TSDBF and TPF

The Committee met with representatives of the board of trustees of both the Transnet Pension Fund and the Transnet Second Defined Benefit Fund. The purpose of the meeting was to get a progress update on the implementation of the committee resolutions that relate to the pension funds of Transnet. The presentation highlighted the following:

6.1 Transnet Second Defined Benefit Fund

The Board of Trustees has been in a process of amending the rules in order to effect the increase policy, but the process was taking very long because members had to be consulted broadly. The trustees did experience some resistances from some pensioners. The pension fund has covered the 5 months back-pay, but including two bonuses paid to the pensioners. That was done through a rule that allows the trustees to pay out annual bonuses, subject to affordability.

The Committee was informed that there are too many processes that were hampering progress, which included, court cases, threats, and malicious lies in the media.

6.2 Transnet Pension Fund

The pension fund was administering 4 000 pensioners of which 1 500 are active members. In December, the pension fund made a 5-month pay out to the pensioners.

The challenge that the pension fund had was that there was a discrepancy among pensioners, as there were pensioners who only joined 5 years before retirement. Most of which were racially excluded from being affiliated to the fund. The fund was looking at making special arrangements for pay outs to the previously disadvantaged pensioners.

6.3 Conclusions and Recommendations

The Committee resolved that the pension funds should improve their communication strategies towards the pensioners in order to prevent confusion and misleading information fed to pensioners. Furthermore, the trustees of the TSDBF should still consider to fulfil the full 5 months’ back-pay which would mean a further two months payout in place of the two bonus payments that have already been included in the pay-outs of the five months back-pay. The Committee resolved that the trustees of both funds should forward quarterly report to the Committee on progress regarding the pay-outs to pensioners.

Report to be considered.


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