ATC150513: Report of the Portfolio Committee on Public Enterprises on the Budget Vote [Vote 9] and the Strategic Plan for 2015/16 – 2018/19 of the Department of Public Enterprises, dated 13 May 2015

Public Enterprises

Report of the Portfolio Committee on Public Enterprises on the Budget Vote [Vote 9] and the Strategic Plan for 2015/16 – 2018/19 of the Department of Public Enterprises, dated 13 May 2015
 

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 Parliament, promulgated in terms of the Constitution, the Portfolio Committee on Public Enterprises plays an oversight role on the Ministry, Department and the Entities. The Committee examined the strategic plan and annual performance plan of the Department and its entities, in order to establish the alignment of requested funds with the objectives as stated in the respective strategic plan documents.

 

1.1      Background


The state has a developmental role to play and uses state-owned companies as the primary tools to deliver on its developmental role. A developmental state is typically characterised by the act of government intervention in the economy and directing the course of development rather than relying only market forces. Industrialisation and economic nationalisation are key drivers of developmental states, led by state-owned companies.

The developmental role should support a number of economic and development goals including; delivery of strategic infrastructure that will unlock growth potential in the country; support of the wider economy and marginal business sectors and support of economic recovery where needed. The state requires strategic, organisational and operational capacity to play its developmental role. SOCs fulfil the state’s operational role in this requirement, acting as the implementing agents for national strategy.

 

 

 

 

2.       Strategic Plan of the Department of Public Enterprises

 

The Department of Public Enterprises presented its strategic plan to the Portfolio Committee on Public Enterprises and elaborated a separate annual performance 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 seven state-owned companies. The Department aims to ensure the financial 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 2015/16


The Department is focusing on implementing the National Development Plan during the 2015/16 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 goals over the medium term are to:

  • focus on improving the performance of the portfolio to ensure that the companies can efficiently and effectively carry out their mandates;
  • recognise the role that SOCs needs to play in the current economic context to support the aspirations of the developmental state;
  • build on the progress that has been made in the Department to promote good governance to turnaround the portfolio;
  • Build the capacity of the shareholder through internal re-organisation using existing resources;
  • Review the shareholder oversight to ensure alignment of SOC to developmental outcomes;
  • Promote good corporate governance;
  • Stabilise SOCs by the strengthening of balance sheets and funding options;
  • Drive economic infrastructure investment to enhance the capacity of the economy with emphasis on the Strategic Integrated Projects; and
  • Leverage SOCs procurement spend to support industrialisation and transformation.

 

As stated above over the medium term the Department will focus on facilitating a conducive environment for repositioning SOCs to advance their developmental mandate, while also enhancing the efficiency of strategic transport corridors and the implementation of government’s support package of Eskom.

 

2.3     Policy Priorities for 2015/16

 

As a shareholder representative of Government, the Department does not have the mandate for developing policies. However, 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.

 

State-owned companies are implementation agents of the developmental state, and they are central to the South African economy, they enable economic growth through the following key activities:

2.3.1  Implementation of national policy to drive infrastructure expansion ranging from  energy supply and transportation, to water, sewage and spatial planning to meet and further increase economic demands.

2.3.2 SOCs raise the technology base of the economic industrial sectors driving competitiveness of the country on a local and global scale.

2.3.3 SOCs are also required to be good employers and to exhibit a sense of social responsibility.

 

The Department does not directly execute programmes but seeks to leverage off state ownership in the economy to support the delivery of key outcomes outlined in the NDP and government’s 2014-2019 Medium Term Strategic Framework. Through its mandate, the department contributes to the NDP’s objectives through outcome 4 (decent employment through inclusive economic growth) and outcome 6 (an efficient, competitive and responsive economic infrastructure network). Over the medium term, the Department provides oversight over the following SOCs: Alexkor, Denel, Eskom, The South African Forestry Company (SAFCOL), South African Express (SAX) Airways and Transnet. Its oversight function of South African Airways (SAA) shifted to National Treasury and Broadband Infraco to the Department of Telecommunications and Postal Services.

 

The Department’s medium term focus will be on facilitating a conducive environment for repositioning SOCs to advance their developmental mandate, and enhance their financial viability. It will also enhance the efficiency of strategic transport corridors, including monitoring Transnet’s Market Demand Strategy (MDS) to expand rail and pipeline capacity and improve the productivity in the ports. The Department will also prioritise the implementation of government’s support package for Eskom. Government’s support package to Eskom is intended to both improve Eskom’s financial sustainability and ensure that the build programme is delivered within the timeframes specified. The stability of the electricity grid and the finalisation of the build programme was highlighted in the President’s State of the Nation Address in February 2015. The Department will oversee the implementation of catalytic projects that form part of strategic integrated projects, and it will oversee the competitive supplier development programme as part of deepening industrial capabilities.

 

2.4       The role of Department of Public Enterprises as a Shareholder           


The Department of Public Enterprises as the “owner” of the SOCs, plays an essential role as a link between stakeholders at various levels. The mandate of the department is distinct from other departments, and can be summarized in the following three primary tasks:

2.4.1   Alignment: Ensure alignment with national policy based on SOC’s capability and

           capacity; Intercede and manage Executive expectations in respect of SOCs.

2.4.2   Collaboration: Leverage synergies and collaborate with peer Governmental

           Departments; Intercede and mediate on behalf of SOCs in respect of policy   

           makers and Regulator.

2.4.3   Oversight: Manage and monitor performance of SOCs; primary link between SOCs  

           and other levels of State; translation of national policy and objectives to SOC level

           through an iterative process.

 

2.5     Department’s Expected Outcomes (Deliverables)           

 

The 2014 – 2019 MTSF focuses on infrastructure development as it is the enabler to future economic growth. This infrastructure expansion relies heavily on two SOCs in particular, Transnet and Eskom. In order for this infrastructure programme to be successful, all stakeholders are required to perform their role in enabling SOC’s execution. The department is expected to deliver on the following outcomes:

 

2.5.1  Increasing the electricity generation reserve margin from 1% to 19% in 2019;

2.5.2  Increasing tonnage moved on rail from 207 to 330 Mt in 2019;

2.5.3  Improving operational performance of sea ports and inland terminals from 28 to 35 average GCM/H by 2019; and  

2.5.4   Increasing investment rate of 25% of GDP.

 

The Department is the sole shareholder of some of the largest SOCs in the country, which include Eskom and Transnet. The collective asset value for the department’s SOCs is over R770bn, with Eskom and Transnet accounting for R740bn, ~96% of this value. The department thus plays a critical role in shaping the outcomes of the MTSF and ultimately the NDP. 

2.6    Strategic Projects to Achieve Outcomes of the Strategy

The Department has identified eight strategic projects to achieve the outcomes of the strategy over the next twelve months, and they include the following:

2.6.1     Ensure financial sustainability for SOCs;

2.6.2     Reduce load-shedding (Eskom) through a focused implementation of the Five Point Plan;

2.6.3     Increase volumes across all rail and ports (Transnet);

2.6.4     Accelerate capital programmes across Eskom and Transnet;

2.6.5     Improve performance management of Boards and executives;

2.6.6     Re-organise the shareholder to best perform its role, through robust performance and consequence management;

2.6.7     Incorporate key decision-making capacity within the State to improve collaboration and communication between SOCs;

2.6.8     Clearly define roles and mandates of entities within the system.

 

2.7    Challenges Facing State-Owned Companies

The main challenge facing state-owned companies is an insufficient return on investment, especially for Eskom, Transnet and South African Express Airways. The return generated by SOCs does not cover the cost of the capital invested, and this is the case across a number of SOCs. The lower returns by SOCs have been brought about by lower earnings, and persistent losses over the period and many SOCs are under-capitalised. The current capital expansion programme by SOCs is heavily reliant on debt with the following impact:

 

• The higher cost of debt funding;

• Reduced flexibility in servicing capital – debt poses an obligation to pay interest; 

• Inability to hedge exposures properly.

 

3.      Budget 

 

There is a major imbalance between the budget allocated to the Department and the Assets it oversees. For the 2015/16 financial year the Department has been allocated R267.5 million to oversee R772.2 billion of assets. The current head count will remain unchanged and innovative capacity building approaches are necessary. The resourcing and the overall structure of the Department is not optimum. The review of the institutional model will present options that can be pursued to strengthen the oversight function. 

 

Table 1: Budget Allocation

 

 

Programme

 

Budget

Nominal Rand change

Real Rand change

 

Nominal %

change

 

Real %

change

 

R million

 

2014/15

 

2015/16

 

2016/17

 

2017/18

 

2014/15-2015/16

 

2014/15-2015/16

Programme 1: Administration

 

156.9

 

158.6

 

155.5

 

164.1

 

1.7

 

-  5.6

 

1.08 per cent

 

-3.55 per cent

Programme 2: Legal and Governance

 

24.3

 

23.8

 

26.2

 

27.6

 

-  0.4

 

-  1.5

 

-1.86 per cent

 

-6.35 per cent

 

Programme 3: Portfolio Management and Strategic Planning

 

 

 

138.4

 

 

 

85.1

 

 

 

92.6

 

 

 

98.2

 

 

 

-  53.3

 

 

 

-  57.1

 

 

 

-38.49 per cent

 

 

 

-41.31 per cent

 

TOTAL

 

319.5

 

267.5

 

274.3

 

289.8

 

-  52.0

 

-  64.3

-16.28 per

cent

-20.11 per

cent

 

 

Table 1: describes the changes in allocations from the years 2014/15 and 2015/16. From this the following can be concluded. For programme 1: Administration, has a nominal increase of 1.1 per cent in 2015/16, with real decrease of 3.6 per cent. Programme 1 accounts for the largest allocation of the Department’s overall budget with 59.3 per cent of the budget in 2015/16. Programme 2: Legal and Governance receives the smallest allocation of 8.9 per cent in 2015/16. The programme decreases by 1.9 per cent in 2015/16 or in real terms by 6.4 per cent. Programme 3: Portfolio Management and Strategic Partnerships accounts for the second largest allocation of the budget, accounting for 31.8 cent of the budget in 2015/16. Programme 3’s allocations has decreased by 38.5 per cent in nominal terms and 41.3 per cent in real terms from R138.4 million in 2014/15 to R85.1 million in 2015/16. Overall the Department’s budget decreased by 20.1 per cent in real terms from R319.5 million in 2014/15 to R267.5 million in 2015/16.

 

Compensation of employees amounts to 55.8 per cent of the total budget over the medium term, with goods and services amounting to 37.4 per cent over the medium term. Consultants constitutes 12.5 per cent while travel and subsistence accounts for 8.6 per cent of the overall budget over the medium term.

 

4.         Expenditure Trends: Programmes of the Department

4.1        Programme 1: Administration

 

The purpose of this programme is to provide strategic leadership, management, and support services to the Department.

 

The Department’s core functions require significant administrative support, and a substantial portion (57.5 per cent over the medium term) of the budget is in the Administration programme, which has cross-cutting sub-programmes providing for intergovernmental and international relations, strategic planning, monitoring and evaluation, and communications.

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 49.8 per cent over the medium term. Expenditure on compensation of employees increased between 2011/2012 and 2014/15 by 13.3 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 5.5 per cent from R74.7 million to R87.8 million. The number of personnel is expected to increase from 161 in 2014/15 to 163 in 2017/18 within the programme.

 

Spending on consultants is expected to decrease significantly by 13.9 per cent over the medium term due to Cabinet approved reductions, however, consultants remains 10.3 per cent of the budget over the medium term. Goods and services constitute 47.7 per cent of the budget over the medium term. Travel and subsistence constitute 10.8 per cent of the budget, which is required by the programme to carry out its oversight function of the state-owned companies, situated throughout South Africa.

 

 

 

 

4.2        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 by, among others, monitoring the performance indicators of SOCs.

 

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 7.6 per cent from R19.5 million in 2011/12 to R24.3 million in 2014/15 due to an increase in the compensation of employee’s budget, which comprised 66.4 per cent of the budget during this period. The programme’s budget is expected to increase by 4.3 per cent to R27.6 million in 2017/18. The legal component constitutes the largest unit of the programme at 54.2 per cent of the budget over the medium term, followed by Governance at 33.9 per cent. The legal governance unit increases by 7.5 per cent from R12.3 million in 2014/15 to R15.3 million in 2017/18.

 

Over the medium term, 75.8 per cent of the programme’s budget is allocated to be spent on compensation of employees over the medium term, with the number of personnel expected to remain constant at 20 employees over the medium term. Compensation of employees increases by 5.2 per cent over the medium term, from R17.5 million in 2014/15 to R20.4 million in 2017/18. Expenditure on consultants is expected to remain fairly constant over the medium term from R2.5 million in 2014/15 to R2.4 million in 2017/18, a slight decrease of 0.1 per cent. Legal costs increase by 6 per cent over the medium term, from R2.2 million in 2014/15 to R2.6 million in 2017/18. Travel and subsistence continues to fall, from a decrease of 10.4 per cent from 2011/12 to 2014/15, travel and subsistence falls further by 11.8 per cent over the medium term.   

 

4.3        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. 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.

 

Over the period 2011/12 and 2014/15, Energy Enterprises and Manufacturing enterprises constituted approximately 90 per cent of the programme’s budget. This was due to the following transfers:

  • R116.3 million in 2011/12, R118.3 million in 2012/13, R57.3 million in 2013/14 and R63.1 million in 2014/15 to Denel for indemnity claims and a further R700 million in 2012/13 to recapitalise the company in the Manufacturing sub-programme; and
  • R350 million in 2012/13 to Alexkor in order to address obligations in terms of the deed of settlement in the Manufacturing sub-programme;
  • R40 million in 2011/12 to the Pebble Bed Modular Reactor Company (PBMR) for the decommissioning and dismantling of the plant and implementation of the care and maintenance programme.

 

Over the medium term, the programme’s budget decreases by 10.8 per cent from R138.4 million in 2014/15 to R98.2 million in 2016/17. The decrease is due to the Department not making transfers to the state-owned companies in the foreseeable future. The programme, however, remains the department’s most significant programme, with a budget of R275.9 million over the medium term. Through this programme, the department will support government’s build programme and the overall strengthening of the SOCs balance sheet by developing innovative funding structures and designing the associated compacts with SOCs. The Department will also support the IPAP by enhancing the Competitive Supplier Development Programme (CSDP) as part of government’s localisation scheme.

 

4.3.1     Sub-programmes

 

(I)         Energy Enterprises

 

The purpose of this sub-programme is to strengthen the department’s oversight role by ensuring the alignment of shareholder strategic intent in relation to the SOCs role in achieving government objectives in the energy sector, on an on-going basis. With the Department of Energy, the Department of Public Enterprises will also be coordinating the implementation of government’s 5-point plan, announced in December 2014, to stabilise the electricity generating system in the short and medium term. The budget for Energy Enterprises decreased by 36.1 per cent from 2011/12 to 2014/15, while it is expected to increase by 8.4 per cent over the medium term. The sub-programme constitutes 16 per cent of the overall programme budget over the medium term. The oversight function of Broadband Infraco was situated in the sub-programme, thus the moderated increase in budget.

 

 

(II) Manufacturing Enterprises

 

This sub-programme oversees the SOCs in the defence, mining and forestry sectors, these being Denel, Alexkor and SAFCOL. The sub-programme constituted 58.1 per cent of the budget in 2014/15 but decreased by 39 per cent to only account for 19.1 per cent of the budget in 2015/16. The budget decreased from R80.4 million in 2014/15 to R16.2 million in 2015/16, a decrease of 79.8 per cent in nominal terms. The decrease is due to the R63.1 million the sub-programme received during the Adjusted Appropriations for the indemnity payment to Denel. Thus the budget of R16.2 million in 2015/16 may not be a true reflection of the sub-programme’s budget if another indemnity payment is made to Denel during the 2015 Adjusted Estimates of National Expenditure (AENE).

 

(III) Transport Enterprises

 

This sub-programme oversees the Transnet and South African Express Airways. As stated above, the Department has prioritised enhancing the efficiency of strategic transport corridors which includes the monitoring of Transnet’s market demand strategy to expand rail and pipeline capacity and improve ports’ productivity. They will continue to enter into compacts with Transnet on improving efficiency and on capital projects aimed at creating capacity. Additionally, the Department developed the national corridor performance measurement, which will allow for the assessment of transport corridors and provide a platform for engaging with Transnet. In consultation with the Department of Transport and Transnet, the Department will review the impact of pricing in freight logistics. Further, the Department will continue its quarterly monitoring of the cost escalation on the new multi-product pipeline, with the aim of delivering the project on time and within an appropriate cost structure. The budget for the sub-programme constitutes 23.1 per cent over the medium term of the programme budget. The sub-programme budget increased in nominal terms by 1.6 per cent from R23.1 million in 2014/15 to R23.4 million in 2015/16. The nominal increase is due to the shift of South African Airways to the National Treasury.

 

(IV)    Economic Impact and Policy Alignment

 

The sub-programme ensures policy alignment of SOCs sustainability, economic and social transformation agendas, and compliance with environmental laws, conducts macroeconomic modelling and research as well as economic impact assessments of the SOCs. The sub-programme’s budget constitutes 12.9 per cent of the programme’s budget over the medium term. The sub-programme’s budget increases in nominal terms by 11.9 per cent from R11.6 million in 2014/15 to R12.9 million in 2015/16.

 

(V)  Strategic Partnerships

 

This sub-programme oversees the implementation of catalytic projects, the implementation of innovative funding structures, and implementation of the competitive supplier development programme. It also supports the coordination of the strategic infrastructure projects led by the SOCs in its portfolio. The sub-programme constitutes 17.8 per cent of the programme over the medium term. The sub-programme’s budget increases in nominal terms by 63.3 per cent from R9.3 million in 2014/15 to R15.1 million in 2015/16. This budget will increase by 15.7 per cent over the medium term to R20.4 million in 2017/18.

 

Compensation of employees constitutes 60 per cent of the programme’s budget over the medium term, with goods and services accounting for 24.7 per cent. Compensation of employees increases by 7.7 per cent from R54.9 million in 2014/15 to R68.5 million in 2017/18. Personnel in the programme is projected to remain constant at 77 over the medium term. Goods and services is expected to increase by 13.5 per cent over the medium term from R20.3 million in 2014/15 to R29.7 million in 2017/18. The Department makes use of consultants for specialised services in transport, manufacturing and energy sectors, which is still a necessity, thus consultants increase by 21.5 per cent over the medium term from R12.5 million to R22.3 million. Consultants accounts for 17.3 per cent of the budget over the medium term. This increase in consultants is allowed by the decrease in consultants in Programme 1: Administration.

 

5. Committee Observations:

 

The Committee noted that:- 

5.1        The energy reserve margins in Eskom were very low and there has been an interruption in the provision of electricity through loadshedding;

5.2        The weak financial position of SOCs has resulted in limited ability to fund commercial and expansion activities and thus they are not delivering on NDP and MTSF strategies;

5.3        There is governance instability at Eskom and financial challenges that required urgent intervention;

5.4        The Presidential Review Committee has tabled its report to the President, however there is a slow pace in the implementation of key recommendations such as the introduction of an overaching legislation to guide state-owned companies;

5.5        Transnet requires attention to address risks potentially affecting their potential sustainability;

5.6        The financial and operational inefficiencies and high salaries of executives continue to contribute to the financial woes of state-owned companies.

 

6.        Recommendations

 

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

6.1        addresses Infrastructure-related challenges within SOCs as a matter of urgency (maintenance, new build) as this will provide a platform for the economy to grow;

6.2        considers fast-tracking the introduction of an overarching legislation and the shareholder management bill to empower the Department to execute its shareholder management responsibility and oversight over state-owned companies;

6.3        gives urgent attention to address risks potentially affecting the potential sustainability of Transnet;

6.4        restores governance stability in the department and state-owned companies through the appointment of senior officials and executives respectively;

6.5        improves the financial performance of state-owned companies through the implementation of robust cost containment measures;

6.6        introduces performance and consequence management for executives and contract companies that do not achieve their key performance targets.

 

7.        Conclusion

 

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.

 

 

 

 

Documents

No related documents