ATC140711: Report of the Portfolio Committee on Public Enterprises on the Budget Vote (Vote 11) and the Strategic Plan of the Department of Public Enterprises, dated 9 July 2014

Report of the Portfolio Committee on Public Enterprises on the Budget Vote (Vote 11) and the Strategic Plan of the Department of Public Enterprises, dated 9 July 2014

The Portfolio Committee on Public Enterprises having received 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 National Assembly, promulgated in terms of the Constitution, the Portfolio Committee on Public Enterprise plays an oversight role on the Ministry, Department and the entities. The Committee has to scrutinise the Strategic Plan and annual performance plan of the Department and its entities in order to see if the funds requested are aligned to the objectives as stated in the respective strategic plan documents .

1.1 Background

The global economic downturn, due to the collapse of the financial system, affirmed the need for a strategic role of the state in counteracting the effects of the downturn and stimulating recovery, this entailed increasing investment in the economy by the state and much more effective use of monetary policy to stimulate economic activity. The recognition of the role of the state in the economy has increased the need to ensure that state-owned companies (SOCs) align their activities to support the broad developmental outcomes of Government. The strategic plan of the department is informed by the following principles:

• Coordination and coherence with government overarching policy frameworks;

• Identifying clear outcomes to be pursued by the Department;

• Delivering in the constrained economic environment; and

• Focusing on cross-cutting outcomes within the Department and Government.

2. Strategic Plan of the Department of Public Enterprises

The Department of Public Enterprises presented their Strategic Plan to the Portfolio Committee on Public Enterprises and elaborated a separate Annual Plan. The department described the overarching policy and strategic direction and priorities of Government, as articulated in the State of the Nation Address by the President, Budget speech, and National Development Plan.

2.1 Mandate of the Department of Public Enterprises

The mandate of the Department is to ensure that state-owned companies within its portfolio are directed to serve Government’s strategic objectives as outlined in the National Development Plan and further articulated in the New Growth Path, and the Industrial Policy Action Plan. The Department exercise shareholder responsibility over the eight state-owned companies. The Department aims to ensure the sustainability of the state-owned companies and supports the government’s strategic priorities of economic growth, expanding employment and developing infrastructure.

2.2 Strategic Goals of the Department 2014/15

The Department is focusing on implementing the National Development Plan during the 2014/15 financial year. The main goal of the Department is to ensure that the state-owned companies support the implementation of the National Development Plan and contribute to the achievement of outcomes outlined in the plan.

The Department’s strategic objectives over the medium term are to:

• Review the shareholder oversight to ensure alignment of SOC to developmental outcomes;

• Promote good corporate governance

• Build internal capacity to enhance Department’s ability to execute its Strategic Plan and fulfill its mandate

• Stabilise and strengthen the state-owned companies, focusing on their balance sheets and funding options

• Drive economic infrastructure investment to enhance the capacity of the economy, with emphasis on the strategic integrated projects

• Leverage off state-owned companies’ procurement spending to support industrialisation and transformation.

2.3 Policy Priorities for 2014/15

As a shareholder representative of Government, the Department does not have the mandate for developing sector-specific policies but policies relating to the overarching shareholder mandate of oversight and governance. Some of the powers and duties of the Department are intertwined with those of other Government Departments who are key role players in the SOC regulatory environment. These include the Department of Energy, the Department of Transport, the Department of Communications, and the Department of Mineral Resources, among others. However, the Department and its SOCs are required to align with various other economic policies such as the National Development Plan (NDP), the New Growth Path (NGP), the Industrial Policy Action Plan and various other charters.

The National Development Plan specifically mentions state-owned companies and the role they have to play in improving infrastructure in the country. The plan specifically identified the “institutional weaknesses related to state-owned companies responsible for network infrastructure”. The plan goes on to state that “averting such problems requires clear institutional arrangements, transparent shareholder compacts, clean lines of accountability and sound financial models to ensure sustainability”. The plan sets out clear actions required to meet the institutional weaknesses mentioned above. Infrastructure is also highlighted in the New Growth Path as a driver of job creation, which was echoed in the President’s State of the Nation Address delivered in February 2014.

The Department plans to strengthen its oversight function over the state-owned companies by increasing its capacity over the medium term for which the Department received R78.3 million in additional allocations in the 2013/14 financial year. The Department will continue to expand its capacity to carry out its oversight role in relation to the state-owned companies and improve internal efficiencies and the functioning of the Department. The Department will contribute to the objectives of the NDP through Eskom’s build programme and Transnet’s capital expenditure programme in order to improve industrial capabilities, provide sustainable jobs and improve the productive capacity of the economy.

3. Programmes of the Department

3.1 Programme 1: Administration

The purpose of this programme is to provide strategic management, direction and administrative support to the Department, which enables the Department to meet its strategic objectives.

The spending focus over the medium term will be on supporting the Department in playing its oversight role over state-owned companies by providing administrative support to the minister, and corporate and human resource services to the Department. The programme will focus on improving the Department’s efficiency and productivity by reconfiguring its business, which will enable it to carry out its mandate; and will put in place a three-year rolling evaluation plan to assess the impact of programmes implemented by the Department and state-owned companies.

Over the medium term, the majority of the allocation is within compensation of employees, which will provide technical and administrative support to the Department. Expenditure on compensation of employees constitutes 48.5 per cent over the medium term. Expenditure on compensation of employees increased between 2010/2011 and 2013/14 by 15.9 per cent due to funding received for improved conditions of service as well as the increase in personnel to establish new sub-programmes. Over the medium term, expenditure on compensation of employees grows by 6.1 per cent from R66.4 million to R79.3 million. The number of personnel is expected to increase from 138 in 2013/14 to 141 in 2016/17 within the programme.

Spending on consultants is expected to increase significantly by 18.2 per cent over the medium term due to the reassignment of consultants from the Portfolio Management and Strategic Partnerships programme to this Administration programme, following the reorganisation of the Department’s programme. The consultants support the minister and director-general in achieving the Department’s strategy. Goods and services constitute 49.1 per cent of the budget over the medium term with consultants, constituting 10.4 per cent of the goods and services budget. Travel and subsistence constitute 11.6 per cent of the goods and services budget, which is required by the programme to carry out its oversight function of the state-owned companies, situated throughout South Africa.

3.2 Programme 2: Legal Governance

The purpose of this programme is to provide legal services and corporate governance systems, as well as facilitating the implementation of all legal aspects of transactions that are strategically important to the Department and state-owned companies’, and ensures alignment with Governments strategic intent.

3.2.1 Sub-programmes

The Management sub-programme comprises the office of the deputy director general, which provides strategic leadership and management of the programme’s personnel. This sub-programme had a staff complement of 2 in 2013/14.

The sub-programme Legal provides internal legal services and oversight support to sector teams. This entails providing legal services, including transaction and contract management support to the Department, as well as work specifically related to sector teams’ oversight of commercial activities of state-owned companies within their portfolios.

The sub-programme on Governance develops, monitors and advises on legislative, corporate governance and shareholder management systems for the Department and its portfolio of state-owned companies. Risk and compliance management is a component of this unit which is responsible for developing and implementing risk and compliance with laws and regulations.

The spending focus over the medium term will be on increasing the programme’s capacity to provide legal services, and transactions and contract management support; and on facilitating the creation of a legislative framework for the Department’s mandate to ensure compliance with applicable legislation and enhance corporate governance procedures by state-owned companies. The programme’s budget increased by 15.1 per cent from R14.7 million in 2010/11 to R22.3 million in 2014/15 due to increase in the compensation of employees budget, which comprised 61.5 per cent of the budget during this period. The programme’s budget is expected to increase by 6.4 per cent to R26.9 million in 2016/17.

The legal component constitutes the largest unit of the programme at 53.6 per cent of the budget of the medium term, followed by Governance at 35.2 per cent. The legal unit increases by 7 per cent from R11.8 million in 2013/14 to R14.5 million in 2016/17.

Over the medium term, 74.5 per cent of the programme’s budget is allocated to be spent on compensation of employees, with the number of personnel expected to increase from 19 in 2013/14 to 27 posts in 2016/17. The increase in personnel is a continuation of the increase in establishment seen in 2013/14. Compensation of employees increases by 9.9 per cent over the medium term, from R15.4 million in 2013/14 to R20.5 million in 2016/17. Although spending on consultants decreased between 2010/11 and 2013/14 as the internal capacity to perform legal services increased, due to an expected increase in transaction services, contractual agreements and governance agreements, spending on legal costs is expected to increase over the medium term. Although it is stated that legal costs are expected to increase, the table in the budget documentation does not give the figures for legal costs for this statement to be verified.

3.3 Programme 3: Portfolio Management and Strategic Partnerships

The purpose of the programme is to align the corporate strategies of the state-owned companies with government’s strategic intent, as well as monitoring and benchmarking their financial and operational performance and capital investment plans. It intends to align shareholder oversight with overarching government economic, social and environmental policies as well as building of focused strategic partnerships between the state-owned companies, strategic customers, suppliers and financial institutions.

3.3.1 Sub-programmes

The sub-programme, Energy and Broadband Enterprises , manages the portfolio of state-owned companies whose focus is energy and broadband, including Eskom, Pebble Bed Modular Reactor (PBMR) and Broadband Infraco , and provides strategic leadership and management of the programme’s personnel. In 2013/14 the Department focused on the completion and protection of the state’s intellectual property strategy and on monitoring the implementation of the care and maintenance of the Pebble Bed Modular Reactor Company.

The sub-programme Manufacturing Enterprises exercises shareholder oversight over Denel, Alexkor and the South African Forestry Company (SAFCOL). The sub-programme is organised in terms of management and shareholder oversight over the companies. In 2013/14, the Department continued to monitor the execution of activities linked to the deed of settlement with the Richtersveld community supported by the transfer of R350 million in 2012/13 to help Alexkor meet all its obligations related to that settlement.

The sub-programme Transport Enterprises exercises shareholder oversight over Transnet, South African Airways and South African Express Airways. The sub-programme is organised in terms of management and shareholder oversight over the three companies’ performance against targets. The Department closely monitored the implementation of the Transnet Market Demand Strategy (MDS), and the capital roll out programme and other key programmes.

The sub-programme Economic Impact and Policy Alignment aligns state-owned companies with overarching government economic, social and environmental policies. The sub-programme is organised into: management, which provides strategic leadership and management of the sub-programme’s personnel; environmental policy alignment, which oversees alignment and implementation of state-owned companies’ strategically important developments, with a special focus on Eskom’s and Transnet’s build programmes, and provides oversight and alignment of the climate change policy framework for state-owned companies in support of national policies and the green economy; economic policy integration, which focuses on appropriate macroeconomic modelling and research to enhance the links between industrial policy, macroeconomic policy and the role of state-owned companies; and skills development and transformation, which focuses on providing scarce and critical skills by state-owned companies in support of the national skills agenda and the new growth path as well as optimising state-owned companies’ skills training facilities through national skills funding, among others. In 2013/14 the sub-programme analysed and monitored the state-owned companies’ dashboards and completed a transformation dialogue report.

The sub-programme Strategic Partnerships ensures that state-owned companies maintain commercial sustainability and attain desired strategic outcomes and objectives. The sub-programme is organised into: management, which provides strategic leadership and management of the sub-programme’s personnel; project oversight, which entails defining catalytic investments to be driven by the Department and overseeing project implementation from pre-feasibility to completion; funding mechanisms, which assist in developing innovative funding structures and designing associated compacts with relevant partners; and supplier relationships, which develops overarching procurement leverage policies, oversees fleet procurement design and implementation including panel reviews, and develops and implements capability building programmes and institutions.

Over the medium-term the focus will be on enhancing capacity to oversee strategic infrastructure projects. This includes the training of staff and developing new project management tools to improve oversight of the current build programme.

Over the period 2010/11 and 2013/14, Energy and Broadband Enterprises and Manufacturing enterprises constituted 91.9 per cent of the programme’s budget. This was due to the following transfers:

• R181.3 million in 2010/11, R116.3 million in 2011/12, R118.3 million in 2012/13 and R57.3 million in 2013/14 to Denel for indemnity claims and a further R700 million in 2012/13 to recapitalise the company in the Manufacturing sub-programme; and

• R36 million in 2010/11 to Alexkor to establish a joint venture with the Richtersveld community under the out-of-court settlement and R350 million in 2012/13 to address obligations in terms of the deed of settlement in the Manufacturing sub-programme.

• R20 million in 2010/11 and R40 million in 2011/12 to the Pebble Bed Modular Reactor Company for the decommissioning and dismantling of the plant and implementation of the care and maintenance programme.

• R138.6 million to Broadband Infraco for capital and operational costs; reflected as a payment for financial assets during 2010/11.

Over the medium-term, the programme’s budget decreases by 10.6 per cent from R140.8 million in 2013/14 to R100.5 million in 2016/17. The decrease is due to the Department not making transfers to the state-owned companies in the foreseeable future.

3.4 Budget

The Department's budget has decreased from R1.4 billion in 2012/13 to R259 million in 2014/15. However it continues to increase by 9.9% to 2016/17. The decrease from R1.4 billion was the result of transfers to the SOCs. Over the medium term, Compensation of Employees is expected to increase from R131.9 million in 2014/15 to R169.9 million in 2016/17 as a result of the expansion of the establishment over this period. Goods and Services including Payments for Capital Assets is expected to increase from R110 million in 2014/15 to R115.7 million in 2016/17 to support the increased establishment.

3.5 Strengthening Capacity within the Department

The structure of the Department increased from 168 employees in 2009 to 210 in the 2012/13 financial year and will increase to 227 over the MTEF period. The Department has also succeeded in reducing its vacancy rate from 16.7% in 2009 to 11.9% in March 2013. The Department is still faced with challenges in terms of retention of specialists’ skills; however it is exploring ways to retain key skills beyond increases in remuneration packages.

4. Committee Observations:

4.1 The Committee made the following observations :

The Committee noted that:-

4.1.1 There is a need for the Department to find a lasting solution to the problem of copper and electricity theft with the relevant stakeholders;

4.1.2 The energy reserve margins in Eskom are very low, and there is a need for the Department to ensure that there is security of electricity supply;

4.1.3 Some board members of SOCs were serving in too many boards;

4.1.4 The Presidential Review Committee (PRC) has tabled its report to the President, and there was a need for the Department to finalise the shareholder management bill and the review of the remuneration of executives of SOCs in line with the recommendations of the PRC;

4.1.5 The small and emerging suppliers were not given contracts by SOCs because they were not competitive;

4.1.6 There is a lack of investment by private sector in infrastructure development;

4.1.7 The salaries of executives of state-owned companies were too high and exacerbated the inequalities in the South African economy;

4.1.8 Some state-owned companies do not achieve all their performance targets;

4.1 .9 The Department has a shortage of critical and highly specialised skills and that has impacted on its capacity to exercise its oversight responsibilities;

4.1.10 There is lack of a legislation that empowers the Department in exercising its unique shareholder management responsibilities;

4.1.11 There is consistent delays in the construction of the Medupi and Kusile projects, mainly caused by the labour unrest, contractor’s non-compliance with labour legislation and contractors who did not meet performance targets; and

4.1.12 The absence of the Electronic Communications Service License has adversely impacted on Broadband Infraco , and the entity has been unable to deliver on its mandate to roll-out broadband to underserviced and rural areas.

5. Recommendations

The Committee recommended that the Minister of Public Enterprises should ensure that the Department of Public Enterprises:

5.1 review the salaries of executives of state-owned companies in line with the recommendations of the Presidential Review Committee.

5.2 consider introducing an overarching legislation to empower the Department to execute its shareholder management responsibility and oversight over state-owned companies.

5.3 consider mechanisms to curb the scourge of copper theft and report to the Committee within three months on progress.

5.4 develop and implement strategies to ensure that Eskom delivers on time in terms of the construction of Medupi , and should report to the Committee in three months on progress.

5.5 develop guidelines to regulate the maximum amount of boards that members of the boards of SOCs can serve on.

5.6 include a performance target in shareholder compacts that will enforce the promotion and support small and medium enterprises.

5.7 develop mechanisms to incentivize the private sector to invest in infrastructure development.

5.8 develop mechanisms to improve the performance of SOCs with regard to the performance targets for the 2014/15 financial year.

5.9 reduce the use of consultants and should develop a strategy to attract and retain the highly specialized skills required by the Department.

5.10 develop and implement penalties for contractors that do not adhere to legislation and those do not achieve performance targets.

5.11 supply the Portfolio Committee on Public Enterprises with copies of the shareholder compacts of SOCs to enhance the oversight work of the Committee.

6. Conclusion

The Committee resolved that it would interact with the Portfolio Committee on Telecommunications and Postal Services to jointly address the need to issue an electronic communications service license to Broadband Infraco .

Having considered the budget vote and the strategic plan of the Department of Public Enterprises, the Committee recommends that the House passes the budget.

Report to be considered.