ATC170517: Report of the Portfolio Committee on Public Enterprises on Budget Vote 9: Public Enterprises, and the annual performance plan for 2017/18 of the Department of Public Enterprises, dated 17 May 2017
Public Enterprises
Report of the Portfolio Committee on Public Enterprises on Budget Vote 9: Public Enterprises, and the annual performance plan for 2017/18 of the Department of Public Enterprises, dated 17 May 2017
The Portfolio Committee on Public Enterprises, having received a briefing from the Department of Public Enterprises on the annual performance plan and on the budget vote on 10 May 2017, reports as follows:
1. Introduction
Guided by the Rules of Parliament, promulgated in terms of the Constitution, the Portfolio Committee on Public Enterprises plays an oversight role on the Ministry, Department and the Entities. The Committee has to scrutinise the Strategic Plan 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 state has a developmental role to play and uses state-owned companies as the primary tools to deliver on its developmental role. 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.
1.2 Strategic Context
South Africa faces difficult choices in a rapidly changing world. Economic growth, which has steadily weakened over the past five years, is likely to increase moderately over the medium term. Yet this rate of growth will not be sufficient to markedly reduce unemployment, poverty and inequality. Government’s measured fiscal consolidation is working to narrow the budget deficit and stabilise debt, building confidence in the economy. But substantial revenue under collection in 2016/17 has imposed sharper limits on public spending. At the same time, the rise of aggressive unilateralism in advanced economies, and mounting uncertainty over the course of world trade, pose serious threats to the global outlook. In the context of these pressures, the 2017 Budget sets out a series of proposals to raise additional revenue, sustain core expenditure, improve value for money spent, stabilise the public finances, and contribute to growth and transformation.
1.2.1 Rising global uncertainty
Between 2000 and 2008, South Africa’s economic fortunes rose on the strength of a commodity boom and robust domestic investment. The economy expanded rapidly and created jobs. Government developed an ambitious policy agenda, eventually articulated in the National Development Plan (NDP). When the global financial crisis broke in 2008, the healthy state of the public finances enabled government to intervene decisively to support the economy, while sustaining social programmes and continuing to invest in infrastructure. But by 2011, the year that the NDP was published, the decade-long upswing in commodity prices had begun to turn, signalling deeper shifts in the global economy. The pace of Chinese industrialisation began to flag. World trade began to slow. A debt crisis broke out in Europe. Geopolitical tensions began to rise. Longer-term trends in developed countries – ageing populations, slowing productivity and widening inequality – became more pronounced. Imbalances in globalisation, stagnant incomes for the majority and distrust of elites took centre stage in global discourse.
Over the medium term, economic growth is forecast to improve moderately on the strength of several developments:
- The real exchange rate has depreciated, boosting competitiveness
- An uptick in commodity prices is expected to carry through into 2017
- The severe drought has eased in several farming regions
- Electricity supply has stabilised
- Improved labour relations are expected to boost job creation.
Government, working with business, labour and civil society, can act decisively to boost investment in the short term by:
- Finalising the Mineral Resources and Petroleum Development Amendment Bill, and legislation on land holdings and security of tenure. Certainty will promote investment in mining and agriculture.
- Concluding the transition from analogue to digital television signals, and allocating new spectrum to broadband services. Cheap and reliable internet will lower costs and create business opportunities for new entrants. It can also provide a platform to expand health and education services in remote areas.
- Expanding the independent power producer programme in renewables and gas. An expansion that provides certainty to investors can open up substantial opportunities for black-owned firms, create thousands of jobs and boost power supply.
- Ensuring that the state performs its economic regulatory functions effectively. For example, speeding up the verification of black empowerment credentials and local content requirements would support transformation and local manufacturing.
- Reinforcing South Africa’s commitments to global standards in financial sector regulation. South Africa needs to maintain its position as an investment destination, supported by a sophisticated business and financial sector, and adherence to international standards.
- Safeguarding the country’s investment-grade credit rating. Maintaining a sustainable, realistic fiscal framework that promotes transformation, a stable labour relations environment and reliable electricity supply will go a long way to reduce risk perceptions.
- Addressing shortcomings in state infrastructure planning and execution.
In April 2017, Standards and Poor (S&P) Global Ratings lowered the long-term foreign currency sovereign credit rating on the Republic of South Africa to ‘BB+’ from ‘BBB-‘ and the long-term local currency rating to ‘BBB-‘ from ‘BBB’. S&P also lowered the short-term foreign currency rating to ‘B’ from ‘A-3’ and the short-term local currency rating to ‘A-3’ from ‘A-2’. The outlook on all the long-term ratings is negative. In addition, S & P lowered the long-term South Africa national scale rating to ‘zaAA-‘from ‘zaAAA’. The ratings agency affirmed the short-term national scale rating at ‘zaA-1’.
Standards & Poor has also reassessed South Africa’s contingent liabilities. This reflects the increased risk that nonfinancial public enterprises will need further extraordinary government support. The ratings agency expect guarantee utilizations will reach R500 billion in 2020, or 10% of 2017 GDP. The utilizations are dominated mainly by Eskom (BB-/Negative-), which benefits from a government guarantee framework of R350 billion (US$25 billion)–about 7% of 2017 GDP. The ratings agency estimate Eskom will have used up to R300 billion of this framework by 2020.
South Africa’s energy regulator has capped Eskom’s permitted 2017/2018 tariff increase at 2.2% – with negative implications for its financial performance. Eskom will fund the resulting revenue gap via borrowings of up to R70 billion, of which up to half may utilize government guarantees. Eskom still has to complete its board appointments and appoint a permanent CEO. Broader reforms to state-owned enterprises are still being discussed and the ratings agency does not foresee implementation in the near term.
2. Strategic Plan of the Department of Public Enterprises
The Department of Public Enterprises presented an Annual Performance Plan for 2017/18 financial year informed by the Strategic Plan that was presented to the Committee. 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 Department of Public Enterprises is the shareholder representative for government at the state-owned companies in its portfolio. The department’s mandate is to fulfil oversight responsibilities at these state-owned companies to ensure that they contribute to the realisation of government’s strategic objectives, as articulated in the National Development Plan (NDP), the medium-term strategic framework (MTSF), the New Growth Path (NGP) and the Industrial Policy Action Plan (IPAP). State-owned companies are crucial to driving the state’s strategic objectives of creating jobs, and enhancing equity and transformation. The department does not directly execute programmes but seeks to use state ownership in the economy to support the achievement these objectives.
2.2 Strategic Objectives of the Department
The Department introduced its new strategy in 2015 based on the need to accelerate the stabilisation of SOCs and reposition them to deliver on the Government’s commitments outlined in the NDP as well as the MTSF 2014-2019. The two documents continue to provide a planning framework for the Department and the development of economic strategies in South Africa to reshape the economic landscape for better development outcomes.
The Department’s revised strategy is informed by the need to accelerate execution of intervention that are necessary to turn around the economy and address the structural challenges outlined in the nine point plan as well as create a long-term goal on the management of SOCs. Supporting the restructuring of the economy through the effective of use of the State’s investment in SOCs will remain the Department’s primary objective, but it will also ensure that SOCs have capacity to do so.
According to the Department’s strategy; over the remainder of the current administration period, the Department will pursue a limited set of objectives that will maximise its contribution to the restructuring of the economy including accelerating transformation in the SOCs’ value chain. The strategic objectives of the Department are not defined per programme, but are based on the outcomes that cannot be realised by a single programme. This is intended to promote cooperate within the organisation and create the basis for a creation of a matrix organisation.
Table 1: The DPE Strategic Objectives
|
Strategic Objectives |
Strategic Objectives Outputs Inputs
|
|
Strategic objective 1 |
Promote independent financial sustainability of SOCs |
|
Objective Statement |
Improve the financial sustainability of SOCs through the design and implementation of programmes that will reduce costs or develop new markets, e.g. pursue opportunities in the African continent. |
|
Baseline |
In the 2015/16 financial year, two SOCs posted a loss and the objective is to ensure that, by the end of the administration period, the losses in the SOCs are reduced and their level of dependency on guarantees is reduced. |
|
Strategic objective 2 |
Promote commercial viability of SOCs’ operations |
|
Objective Statement |
Ensure that services provided by SOCs meet the user requirements through setting clear service standards and continuously evaluating progress focused on the network services, such as rail, ports and electricity. |
|
Baseline |
No major disruption in the services offered by SOCs during the 2016/17 financial year. Performance of strategic corridors has not been optimal. |
|
Strategic objective 3 |
Position SOCs to support the industrialisation of the South African economy. |
|
Objective statement |
Ensure that services provided by SOCs meet the user requirements through setting clear service standards and continuously evaluating progress focused on the network services, such as rail, ports and electricity. |
|
Baseline |
The Department has been implementing the Competitive Supplier Development Programme (CSDP) to promote localisation in rollout of the capital expenditure programme. |
|
Strategic objective 4 |
Increase contribution of the SOCs to support the transformation of the South African economy. |
|
Objective statement |
SOCs are major players in industries/sectors in which they operate and can leverage this position to promote transformation in their value chains and their suppliers. |
|
Baseline |
SOCs have been playing an active part in promoting participation of the previously disadvantaged in sectors such as mining and manufacturing of products used in production processes. However, this has been insufficient. SOCs must also actively promote the implementation of the 30% set aside. |
|
Strategic objective 5 |
Promote institutional alignment in the execution of oversight function. |
|
Objective statement |
Oversight function is important to promote coherence in the management of State assets and their impact in driving and/or delivery of developmental state objectives. The objective is to create a single approach in the exercise of the oversight function across the State. |
|
Baseline |
No coherent approach in the exercise of oversight of strategic SOCs. |
|
Strategic objective 6 |
Promote the development of a strong shareholder |
|
Objective statement |
This is focused on strengthening the Department’s capacity to oversee SOCs and lead in the creation of standards for the oversight function across the Government and different spheres. |
|
Baseline |
Systems to promote efficiency in the execution of oversight have been developed but are insufficient to deal with sophistication of SOCs operations. This also includes improving compliance to legislation with the Department, eg clean audits. |
|
Strategic objective 7 |
SOCs have been playing a central part in facilitating the movement from a consumption driven growth to investment driven growth. The delivery of infrastructure programme, is therefor, central to turning around the economy and moving to a different growth path. The key is to ensure that SOCs play an increasing role in scaling the public sector investments from 7% of GDP to 10% as outlined in the MTSF |
The Department’s ability to achieve its strategic objectives is dependent on the economic environment and its ability to provide oversight to the SOCs. Critical in this regard is the development of the overarching legislation framework that will govern SOCs. It is critical that a board oversight mechanism be put in place to ensure that SOCs’ boards provide their fiduciary duties accordingly. Boards should be capacitated to fulfil their function. Executive directors’ role remain in ensuring that SOCs are financial sustainable, commercial viable and meet the development agenda. The Department should be clarifying roles between the shareholder and SOCs’ boards in its shareholder contracts. Government as shareholder require maximum returns, excellent productivity, a low debt/equity ratio and, simultaneously, maximum investment in infrastructure and service delivery at the lowest cost. Without balanced performance these competing objectives may not be achieved and the sustainability of the state-owned enterprise may be threated.
2.3 Policy Priorities for 2016/17
The Department of Public Enterprises oversees six state-owned companies: Alexkor, Denel, the South African Forestry Company, Eskom, South African Express Airways and Transnet. These companies are key drivers of economic growth over the short and medium term. The department monitors state-owned companies to ensure that the right investments are made to create jobs and sustain economic growth. In delivering on its mandate, the department contributes to the NDP objectives as expressed in outcome 4 (decent employment through inclusive growth) and outcome 6 (an efficient, competitive and responsive economic infrastructure network) of government’s 2014-2019 medium-term strategic framework. The department’s focus over the medium term is on strengthening its oversight capacity and ensuring that state-owned companies under its authority are contributing to investment in key infrastructure.
2.3.1 Strengthening oversight capacity
In February 2015, the department developed a new strategy to improve the performance of state-owned companies in order to sustainably enhance their contribution to the implementation of the NDP. The strategy calls for the department to strengthen its ability to execute its oversight mandate and increase its capacity to perform the oversight function. Several initiatives are underway in this regard.
The department is developing a government shareholder policy, which is expected to standardise the shareholder function, improve the interface between the state and the private sector, and streamline and maximise the impact of the state’s investments in the economy. A draft of the policy has been prepared and consultations with departments in the economic cluster are under way. Oversight activities such as the development of a government shareholder policy, involve significant travel and the technical research provided by consultants. Spending on travelling over the medium term is expected to reach R17.7 million in 2019/20, declining at an average annual rate of 6.5 per cent once the policy has been prepared, while spending on consultants is set to reach R36.8 million, growing at an average annual rate of 2.3 per cent. However, the department’s overall spending on goods and services is expected to decrease over the medium term by R2.7 million, and payments for capital assets by R116 000, as the department cuts spending as part of curtailing overall aggregate spending.
The department is reorganising its internal operational model so that it is structurally equipped to support the new strategy. As such, over the medium term, the department expects to prioritise capacity in the Portfolio Management and Strategic Partnerships programme. The department has also implemented measures to ensure vacant positions are filled timeously, including introducing an electronic recruitment system. To ease the effects of the baseline reductions, the department is in the process of realigning its departmental organisational structure and is considering implementing reductions on non-core goods and services items. The department’s approved personnel establishment is set to decrease from 218 in 2016/17 to 212 in 2019/20. Spending on compensation of employees is 57.4 per cent of the total budget in 2016/17 and is expected to grow to reach R184.5 million in 2019/20.
2.3.2 Increasing investments of state-owned companies
The capital expenditure programme in state-owned companies, under the oversight of the department, is an important policy instrument to accelerate economic growth. The programme is intended to enhance the capacity of infrastructure networks, such as rail and electricity, to improve the competitiveness of the economy in the medium to long term. The department as a shareholder determines key infrastructure projects to be pursued that contribute to national policy imperatives and it ensures that state-owned companies invest in such infrastructure. Investments by state-owned companies have significantly increased from approximately R25 billion a year in 2005 to more than R160 billion in 2015. This has largely been driven by Eskom and Transnet, which invested more than R90 billion in 2015. The implementation of Eskom’s build programme, a key example of investment in public-sector infrastructure, has played a pivotal role in addressing the energy challenges experienced in the past two financial years, with the company commissioning additional units to boost its base load and peak capacity. In 2015/16, Eskom’s continued implementation of the electrification programme meant that the number of households connected to the grid had increased to 90 per cent. Transnet continues to spearhead the delivery of government’s economic growth objectives with regard to the Operation Phakisa programmes, with particular focus on growing GDP and creating jobs through the oceans economy, and has allocated R2 billion towards improving port infrastructure. The implementation of the market demand strategy continues to be a key driver in improving the performance of ports. Despite economic challenges, spending on the capital and infrastructure investment programmes, which is designed to expand freight logistics infrastructure, remains stable. In 2016/17, state-owned companies are expected to spend R90 billion on replacing existing infrastructure and creating additional capacity.
3. Programmes of the Department
3.1 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 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 56.4 per cent over the medium term. Expenditure on compensation of employees increased between 2013/2014 and 2016/17 by 6.7 per cent due to funding received for improved conditions of service. Over the medium term, expenditure on compensation of employees grows by 8.1 per cent from R80.9 million to R102.1 million. The number of personnel is expected to remain constant at 124 employees over the medium term.
Spending on consultants is expected to decrease by 7.0 per cent over the medium term due to Cabinet approved reductions, however, consultants remains 7.4 per cent of the budget over the medium term. Goods and services constitute 41.8 per cent of the budget over the medium term. Travel and subsistence constitute 5.5 per cent of the budget, and decreases by 6.5 per cent over the medium term, 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 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 average budget has stayed the same over the 2013/14 - 2016/17 period. The programme’s budget is expected to increase by 3.0 per cent from R25.9 million in 2016/17 to R28.3 million in 2019/20.
The sub-programme Legal constitutes the largest unit of the programme at 52.4 per cent of the budget over the medium term, followed by the sub-programme Governance at 35.5 per cent. The Legal unit increases by 4.7 per cent from R13.1 million in 2016/17 to R25.2 million in 2017/18.
Over the medium term, 79.8 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 decrease from 21 employees in 2016/17 to 20 employees over the medium term. Compensation of employees increases by 4.9 per cent over the medium term, from R20.0 million in 2016/17 to R23.1 million in 2019/20. Expenditure on consultants is expected to decrease by 1.3 per cent over the medium term from R1.9 million in 2016/17 to R1.8 million in 2019/20. Legal services increase by 1.0 per cent over the medium term, while travel and subsistence decreased by 15.0 per cent from R1.5 million in 2016/17 to R0.9 million over the medium term.
3.3 Programme 3: Portfolio Management and Strategic Partnerships
The purpose of the programme is to align the strategies of the SOCs with government policy and strategy, and monitor and benchmark their financial and operational performance and capital investment plans. Align shareholder oversight with overarching government economic, social and environmental policies and build focused strategic partnerships between the SOCs, strategic customers, suppliers and financial institutions.
Over the medium term, the programme’s budget increases by 3.1 per cent from
R86.3 million in 2016/17 to R94.6 million in 2019/20. The increase is due to the Department strengthening its ability to execute its oversight mandate and increase its capacity to perform the oversight function. The programme, however, remains the department’s most significant programme, with a combined budget of R268.9 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 as part of government’s localisation scheme.
3.3.1 Sub-programmes
The sub-programme Energy Enterprises purpose 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. The Department will oversee Eskom’s support package and ensure that the entities build programme contributes to the countries growth objectives. The budget for Energy is expected to increase by 2.1 per cent over the medium term, from R17 million in 2016/17 to R18.1 million in 2019/20. Over the next three financial years until 2019/20, the programme constitutes 19.6 per cent of the total programme expenditure.
The sub-programme Manufacturing Enterprises oversees the SOCs in the defence, mining and forestry sectors, these being Denel, Alexkor and SAFCOL. The budget increases from R19.7 million in 2016/17 to R22 million in 2019/20, an increase of 3.7 per cent in nominal terms. Over the medium term, the sub-programme constitutes 23.1 per cent of the programme’s budget.
The sub-programme Transport Enterprises oversees the Transnet and South African Express Airways. 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. In consultation with the Department of Transport and Transnet, the Department will review the impact of pricing in freight logistics.[1] The budget for the sub-programme constitutes 23.8 per cent of the programme budget over the medium term. The sub-programme budget decreased in nominal terms by 1.9 per cent from R23.0 million in 2016/17 to R21.76 million in 2019/20.
The sub-programme Economic Impact and Policy Alignment 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 19.0 per cent of the programme’s budget over the medium term. The sub-programme’s budget increases in nominal terms by 12.1 per cent from R13.6 million in 2016/17 to R19.1 million in 2019/20.
The sub-programme Strategic Partnerships 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 14.5 per cent of the programme over the medium term. The sub-programme’s budget increases in nominal terms by 1.9 per cent from R13 million in 2016/17 to R13.7 million in 2019/20.
Compensation of employees constitutes 64.0 per cent of the programme’s budget over the medium term, with goods and services accounting for 36.0 per cent. Compensation of employees increases by 3.9 per cent from R53.0 million in 2016/17 to R59.4 million in 2019/20. Personnel in the programme is projected to decrease from 73 employees in 2016/17 to 68 employees over the medium term.
Goods and services is expected to increase by 2.0 per cent over the medium term from R33.3 million in 2016/17 to R35.2 million in 2019/20. Oversight activities such as the development of the government shareholder policy, involve significant travel and the technical research is provided by consultants, thus consultants increase by 8.3 per cent over the medium term from R19.0 million in 2016/17 to R24.2 million in 2019/20. Consultants accounts for 23.5 per cent of the budget over the medium term. This increase in consultants is allowed by the decrease in consultants in Programme 1: Administration.
3.4 Budget
Over the medium term the Department will focus on strengthening its oversight capacity and ensuring that SOCs under its authority are contributing to investment in key infrastructure.
Table 1. Estimate of Expenditure over the medium term
|
Programme |
Budget |
Nominal Rand change |
Real Rand change |
Nominal % change |
Real % change |
|||
|
R million |
2016/17 |
2017/18 |
2018/19 |
2019/20 |
2016/17-2017/18 |
2016/17-2017/18 |
||
|
Programme 1: Administration |
155,8 |
155,5 |
162,5 |
173,6 |
- 0,3 |
- 9,5 |
-0,19 % |
-6,11 % |
|
Programme 2: Legal and Governance |
25,9 |
25,2 |
26,4 |
28,3 |
- 0,7 |
- 2,2 |
-2,70 % |
-8,47 % |
|
Programme 3: Portfolio Management and Strategic Partnerships |
86,3 |
86,0 |
88,3 |
94,6 |
- 0,3 |
- 5,4 |
-0,35 % |
-6,25 % |
|
TOTAL |
268,0 |
266,7 |
277,2 |
296,5 |
- 1,3 |
- 17,1 |
-0,49 % |
-6,38 % |
Source: National Treasury (2017)
Table 1 describes the changes in allocations from the years 2016/17 and 2017/18, and the outer years of the MTEF. From this the following can be concluded:
- Programme 1: Administration, has a nominal decrease of 0.19 per cent in 2017/18, with real decrease of 6.11 per cent. Programme 1 accounts for the largest allocation of the Department’s overall budget with 58.3 per cent of the budget in 2017/18.
- Programme 2: Legal and Governance receive the smallest allocation of 9.5 per cent in 2017/18. The programme decreases by 2.7 per cent in 2017/18 or in real terms by 8.5 per cent.
- Programme 3: Portfolio Management and Strategic Partnerships accounts for the second largest allocation of the budget, accounting for 32.3 cent of the budget in 2017/18. Programme 3 allocations has decreased by 0.4 per cent in nominal terms and 6.3 per cent in real terms from R86.3 million in 2016/17 to R86.0 million in 2017/18.
Overall the Department’s budget decreases by 6.4 per cent in real terms from R268.0 million in 2016/17 to R266.7 million in 2017/18.
Compensation of employees amounts to 62.6 per cent of the total budget over the medium term, with goods and services amounting to 36.3 per cent over the medium term. Of the goods and services budget, the use of consultants constitutes 33.0 per cent while travel and subsistence accounts for 16.8 per cent of the budget over the medium term period from 2016/17 to 2019/20.
4. Report of Auditor-General on Annual Financial Statement for the Department of Public Enterprises for the year ended 31 March 2016
The overall audit outcomes found that Department with regards to three year trend on overall regression in audit outcomes, compliance with key legislation and quality of annual performance plans and performance reports. The portfolio’s overall audit outcome regressed over the past three years mainly due to non-compliance identified at the Department of Public Enterprises (DPE). Department’s compliance with key legislation is 67%, preparing financial statements remains a concern as material adjustments were made to those submitted for audit. Inadequate monitoring resulted in non-compliance with Supply Chain Management (SCM) legislation, mainly due to poorly motivated deviations. Although internal controls detected UIFW expenditure, they are not mature enough to prevent it. The DPE submitted annual performance reports that were useful and reliable. The auditor general raised on the status of key controls, leadership such as oversight responsibility and effective human resources management is of concern. Concerns were also raised with regards to Department’s financial and performance management with regards to its ability to present regular, accurate and complete financial information, ability to review and monitor compliance and design and implement IT controls. No significant progress was made in the portfolio to address the internal control weaknesses in relation to preparing financial statements and compliance with legislation. Misstatements were identified in the financial statements that resulted in material adjustments to the financial statements submitted for audit. The implementation of controls was also inadequate to ensure the prevention of irregular expenditure.
4.1 Root causes to be addressed in SOCs:
•Vacancies in key positions (CEO and CFO) within the portfolio is a concern. They need to be filled promptly to implement action plans developed to improve audit outcomes
•Vacancies should be filled with appropriately qualified individuals who are held accountable for fulfilling their responsibilities.
4.2 Status of key commitments by minister
The following are commitments by the minister to the auditor general that have been implemented:
- All SOCs in the portfolio must provide the DPE with action plans and progress made to address audit findings and achieve clean audits.
- The engagements between the audit committee and board chairpersons of SOC and the executive as per the DPE calendar.
The following are commitments by the minister to the auditor general that are still in progress:
- DPE and SOCs must prepare interim financial statements where feasible subject to an interim audit. Only exception is SAX ass agreed with DPE.
- Focus on sustainability of the clean audit and clean administration in order to lead by example
- Conclude the Government Shareholder Management Act which will include the identification of support measures for SOCs to conduct business in a sustainable manner with no financial support from the state
- Internal audit must implement processes to review actions taken by SOCs to improve audit outcomes.
4.3 Proposed Commitments implemented by the Portfolio Committee and Management
- Senior management should take immediate action to implement action plans developed to address irregular expenditure and ensure that officials are held accountable for not adhering to the set policies and procedures
- Performance management measures should be implemented within the portfolio and link bonus payments to the audit outcomes
- Senior management must ensure that year-end processes to prepare financial statements are properly documented and adhered to in a timely manner by all involved.
- Vacancies should be filled with appropriately qualified individuals who are held accountable for fulfilling their responsibilities
5. State Owned Companies Performance
5.1 Alexkor
Alexkor was established in terms of the Alexkor Limited Act (1992) to mine marine and land diamonds in Alexander Bay. As part of the 2007 deed of settlement for the restoration of land and mineral rights between government and the Richtersveld community, Alexkor is the owner of the sea mining rights and 51 per cent of the mining operations in Richtersveld. The land mining rights and the balance of the mining operations are owned by the Richtersveld community. The mining operations are managed through an unincorporated entity, the Alexkor Pooling and Sharing Joint Venture. Alexkor is also exploring opportunities to mine coal and limestone to supply to Eskom’s power stations to support the energy security objectives in outcome 6 (an efficient, competitive and responsive economic infrastructure network) of government’s 2014-2019 medium term strategic framework.
Alexkor experienced operational challenges during 2015/16 that led to poor carat production and a 7 per cent decrease in revenue. As a result, the company reported a loss of R35 million in the period and has implemented turnaround strategies to improve carat production at the Alexander Bay operations. A mining vessel commissioned to explore deep-sea diamond resources is expected to complement current carat production and improve Alexkor’s financial position.
In 2014, the company commissioned a study into non-mining activities in Northern Cape that the Richtersveld community could possibly pursue from the proceeds of the pooling and sharing joint venture. The focus areas of the study include agricultural and mariculture opportunities. The study has begun and feedback will be given once it is completed.
5.2 Denel
Denel was incorporated as a private company in 1992 in terms of the South African Companies Act (1973), with its sole shareholder being the South African government. In terms of the 2014 Defence Review, Denel is deemed a strategic national asset in support of national security. The Department of Defence and the South African National Defence Force are its primary customers. Denel operates in the military and civil aerospace, land, maritime, and defence electronic environments. Denel’s advanced industrial capabilities support outcome 6 (an efficient, competitive and responsive economic infrastructure network) of government’s 2014- 2019 medium-term strategic framework and the industrial policy action plan. The defence and aerospace sector has strong upstream and downstream linkages with other key sectors in the economy, and has high export potential.
Denel has made strides in achieving sustainability and has been ranked among the top 100 global defence manufacturers for the past two consecutive years. In 2015/16, the company grew its revenue by 41 per cent, or R8.2 billion, from the previous financial year. Export revenue in that year constituted 58 per cent of total revenue and net profit was R395 million, an increase of R125 million from the previous financial year.
However, this rapid growth has placed significant strain on the company’s cash resources. Denel remains highly geared, with debt of R3.7 billion, up from R2.2 billion in 2014/15, of which about 45 per cent is due within the next 12 months. The department is working with the company to ensure this cash position is managed responsibly.
A model of the South African regional aircraft, a 24-passenger regional airliner, was released to the public at the 2016 Africa Aerospace and Defence Expo. A pre-feasibility study has been concluded that confirms the viability of the design and the existence of a market for this kind of aircraft. A team from Denel and the department made a presentation in July 2016 to solicit support to complete the next phase of the project. Over the medium term, Denel is preparing to take over the management and operation of the naval dockyards in both Simon’s Town and Durban through the Denel Maritime and Integrated Systems division.
5.3 South African Forestry Company
The South African Forestry Company was established in 1992 to ensure the sustainable management of the state’s forestry plantation assets. The company was established in terms of the Management of State Forests Act (1992). The company’s mandate is to ensure the sustainable management of plantation forests, increase downstream timber processing and play a catalytic role in rural economic development and transformation. The company’s work includes research and development, plantation management and timber processing. Revenue is generated from the sale of forest products, sawn timber and value-added products.
The company operates in the rural areas of Mpumalanga, Limpopo and KwaZulu-Natal and provides opportunities for economic development and rural economic transformation through providing social infrastructure for basic services such as health and education. This is aligned with outcome 7 (comprehensive rural development and land reform) of government’s 2014-2019 medium-term strategic framework. Over the medium term, the company plans to invest in its processing business to ensure the availability of material to build social infrastructure.
The company’s financial performance remains under pressure because of slow growth in revenue and a continual increase in costs. Cash generation from operations has been under strain because of increasing logistical and labour costs, and a rigid pricing environment. This performance has constrained the business in investing in downstream operations, which is critical to sustaining forestry operations and reducing dependence on sawlog customers.
5.4 Eskom
Eskom is governed by the Conversion Act (2001), with a mandate to generate, transmit and distribute electricity to industrial, mining, commercial, agricultural and residential customers and redistributors. In doing this, it contributes to the realisation of outcome 6 (an efficient, competitive and responsive economic infrastructure network) of government’s 2014-2019 medium-term strategic framework.
Eskom generates 95 per cent of the electricity used in South Africa and 45 per cent of the electricity used in Africa. The company’s reserve margin has been steadily declining since 1999 because of a lack of significant investment in generation capacity and an increase in economic growth, which, in turn, has led to an increase in electricity demand. During the years of economic growth, Eskom had to rely on shifting the maintenance of power plants to meet demand and address the constrained power system in an attempt to avoid load shedding.
The consequence of this was an increase in maintenance backlogs and a decline in power plant performance. This necessitated urgent government intervention to assist the company to remain financially and operationally stable. As part of the rescue package from government, Eskom had to develop a turnaround plan incorporating four key areas: financial sustainability, operational sustainability, revenue and customer sustainability, and sustainable asset creation. Eskom’s revenue grew by 10.6 per cent between 2014/15 and 2015/16, from R147.7 billion to R163.4 billion.
The improvement was driven largely by additional revenue of R7.8 billion awarded by the National Energy Regulator of South Africa through the regulator clearing account. The company’s liquidity position increased significantly from R17.4 billion in March 2015 to R38.7 billion in March 2016, largely due to the receipt of the R23 billion equity injection through the government support package. Eskom has already secured 77 per cent of the R69 billion funding requirement for 2016/17. The sources of funding are domestic bond private placement, development finance institutions, export credit agencies, domestic bonds, commercial paper and swap restructuring. Eskom developed a generation turnaround strategy that aims to address the country’s electricity demand while allowing the company to remain financially viable. The strategy has started to yield positive results, with Eskom’s power generation plant availability significantly improving from 73 per cent in March 2015 to 78.6 per cent in March 2016. This shows a positive trend towards the achievement of the 80:10:10 strategy by 2020, which will ensure 80 per cent energy availability from the current fleet, and 10 per cent for unplanned load shedding and 10 per cent for planned load shedding. As at March 2016, there had been no load shedding for almost 11 months, which was achieved through reducing unplanned plant breakdowns from 15.2 per cent in March 2015 to 14.9 per cent in March 2016.
Since 2004, Eskom has been executing a build programme to increase capacity and ensure that the supply of electricity is secure and reliable. The company successfully commissioned Ingula’s units 4, 2 and 1 in 2016/17. These have strengthened the financial position of the company and the security of electricity supply. The commissioning of Ingula added 999 megawatts (MW) of peaking capacity, further reducing the use of the more expensive open-cycle gas turbines. Medupi unit 5 (500 MW) and Ingula unit 3 (333 MW) were synchronised to the grid in September and October 2016, adding an additional 833 MW. In 2015/16, Eskom installed 345.8 kilometres of transmission lines and 2 435 megavolt amperes of transmission capacity. Once completed, the build programme will bring 11 002 MW of new capacity online by 2022. Eskom has significantly improved its implementation of the integrated national electrification programme, which is managed by the Department of Energy. The company electrified 159 853 additional households in 2014/15, and 158 016 additional households in 2015/16. Since the inception of the universal access programme, the number of electrified households has increased to about 5 million.
Eskom acknowledges the role independent power producers play in the South African electricity market. As such, Eskom has connected 58 projects to the grid, enabling access to a further 4 375 MW. As its sole shareholder, Eskom has hosted the Pebble Bed Modular Reactor Company since April 2012 to minimise costs and ensure the implementation of its care and maintenance to protect its intellectual property and assets.
5.5 South African Express Airways
South African Express Airways is a regional carrier with a mandate to provide transportation services for passengers, cargo and mail, air charters, and other related aviation services on low-density domestic routes and African regional routes. It was established in 1994, and operates from OR Tambo International Airport (Johannesburg), King Shaka International Airport (Durban) and Cape Town International Airport, serving secondary routes in South Africa and regional routes to Botswana, Namibia, Democratic Republic of the Congo, Zimbabwe and Zambia. It also provides feeder air services that connect with the South African Airways network.
Over the MTEF period, the department and National Treasury will review the relationship between state-owned airlines with the objective of developing an optimal structure. This will assist in better coordination between the state airlines, and ensure financial stability over the medium term. Once the airline has attained financial stability, it will commence with expanding its operations into Africa and partnering with South African Airways to establish other hubs on the continent.
The airline has experienced challenges with regards to its operational and financial performance, as well as the maintenance of proper systems of internal control. As a result of not maintaining proper internal controls, the airline was issued with a qualified audit opinion on its 2014/15 annual financial statements as a result of being unable to provide sufficient appropriate audit evidence due to a lack of adequate accounting records. It was the fourth consecutive year the airline was issued with a qualified audit opinion on its annual financial statements.
The finalisation of the audit for 2015/16 has also been delayed as the airline has been unable to satisfactorily demonstrate to the Auditor-General its ability to continue operating on a going concern basis for a period of at least 12 months after the signing off of the annual financial statements as required by section 4 of the Companies Act (2008). The department is working with the airline to ensure the matter is resolved.
South African Express Airways has also been implementing a long-term strategy called 20/20 vision, which was developed in 2013 to address its poor performance and reliance on government for financial support. The main focus of the strategy is to assess, review and define a new business model to improve the sustainability of the organisation for the next 20 years. The vision is aligned with South African Airway’s long-term turnaround strategy, and aims to ensure alignment between the airlines’ strategies to derive the maximum shareholder value through greater collaboration, cooperation and coordination.
However, South African Express Airways did not implement the strategy as envisaged, which resulted in the airline developing short-term austerity measures in September 2014. Some of the initiatives include renegotiating contracts and agreements, optimising the network schedule and reducing the labour costs with the intention of making the airline sustainable. The austerity measures were initially expected to result in savings of R579 million over the three years up leading to 2016/17. By the end of 2015/16, the airline had saved R379 million. The airline continues to identify new initiatives to augment those already implemented. However, its achievements have been eroded by its inability to operate an optimal network as a number of aircrafts were grounded because of delays in raising funds to acquire the required spares and rotables. Through the SA Express shareholder compact, the department is working together with National Treasury to ensure that there is alignment between the targets set for South African Airways and South African Express Airways, and that the initiatives outlined in the 20/20 vision are agreed on. The performance against these targets is monitored monthly and quarterly.
5.6 Transnet
Transnet’s mandate is to assist in lowering the cost of doing business in South Africa, enabling economic growth and ensuring security of supply through providing appropriate port, rail and pipeline infrastructure in a cost-effective and efficient manner, within acceptable benchmarks. The Legal Succession to the South African Transport Services Act (1989) brought about the establishment of this state-owned company. Transnet remains the largest freight logistics company in South Africa, enabling competitiveness, growth and the development of the South African economy by delivering reliable freight transport and handling services that satisfy customer demand.
Over the medium term, the company will focus on growing domestic volumes to assist government in moving rail-friendly cargo from road to rail. This will be done by improving the performance of freight corridors so that they are cost effective, reliable and efficient. Regional integration remains integral to ensure South Africa remains competitive in growing the freight logistics networks in Africa and create economic growth to yield the required skills, jobs and investments in critical economic sectors such as containers, automotives, petroleum and gas.
The objectives and strategy of Transnet are agreed on between the Minister of the Department of Public Enterprises and the board of directors through a shareholder compact. This shareholder compact is informed by the medium-term strategic framework and other national policy guidelines such the industrial policy action plan and the new growth path, with the intention to facilitate strategic interventions of government programmes to support economic growth.
Although lacklustre economic performance has exerted pressure on Transnet, its financial position remains sound. However, the poor performance of the economy put pressure on Transnet’s drive to grow volumes in the general freight business. In response, the company provided price reprieves in moving commodities, particularly to the mining industry, to preserve jobs. This resulted in Transnet postponing some of its infrastructure projects, particularly where demand is low, while also aggressively growing general freight markets to increase volumes through the road to rail migration strategy.
6. Committee Observations:
6.1 The Committee made the following observations:
The Committee noted that:-
6.1.1 The personnel budget of the department is too biased towards the administration
rather than sector specific specialists required for oversight.
6.1.2 The process of introducing the Shareholder Management Bill has been too slow, and nothing has been brought to Parliament since the tabling of the Presidential Review Committee.
6.1.3 SOCs have not done enough to create black industrialists and local industries, furthermore there is a need for a more radical approach to advance localization and beneficiation.
6.1.4 SOCs are excluded from incentives that are provided to private sector for job creation and they do not receive any assistance from development finance institutions.
6.1.5 The absence of remuneration standards for state-owned companies exacerbate the inequalities and inconsistencies in the public sector.
6.1.6 The vacancies in the executive positions of state-owned companies need to be filled expeditiously as they have an impact on the stability of the companies.
6.1.7 The corporate social investment programmes of state-owned companies have not yet adequately reached out to rural and poor communities.
6.1.8 The court application of Denel against National Treasury is an indication of the lack of good co-operative governance among state institutions.
6.1.8 There is a lack of vision and commitment on the CEOs and Chairpersons of state-owned companies to the developmental mandate of companies, many are only concerned with the commercial objectives of the company.
- The Minister of Public Enterprises and the Minister of Rural Development and Land Affairs should fast-track the Alexkor Deed of Settlement (DoS) implementation process.
6.1.10 There are concerns regarding community issues been exacerbated by the delay of the payment of the R45 million to the Richtersveld community.
6.1.11 The RMC/CPA/Propco are not properly constituted which has resulted in the delay of the R45 million payment as mentioned above.
6.1.12 There is a need for Alexkor to exhaust all avenues to diversify and expand investments in diamond strategy.
6.1.13 It is very bad for an state-owned company such as Denel to take the National Treasury to court, and it is not in the interest of the country.
6.1.14 The developments at Eskom with regards to corporate governance such as the allegations in the state of capture report, Denton report and PWC reports should be prioritized and recommendations should be implemented.
6.1.15 The cost plus mines owned by Eskom should be accounted for and Eskom should report on their profits in the annual report.
6.1.16 The concerns raised by the ratings agency on Eskom’s future funding gaps which may result in utilization of government guarantees should be addressed.
6.1.17 The nuclear procurement plan to be undertaken by Eskom should not be pursued at all cost at the expense of the financial viability and sustainability of the company.
6.1.18 The reappointment of Mr Brian Molefe as the GCEO of Eskom is a concern and should be addressed by the Minister and the Board.
6.1.19 There is a need for a meeting with the Land Claim Commission to address the outstanding land claims on SAFCOL plantations.
6.1.20 There is a need for SAFCOL to provide a detailed comprehensive plan to turnaround IFLOMA.
6.1.21 There is concern regarding the inability of South African Express Airways to produce audited financial statements for 2016/17 financial year.
7. Recommendations
The Committee recommended that the Minister of Public Enterprises should ensure that the Department of Public Enterprises should within the 2017/18 financial year:
7.1 implement all the recommendations of the Presidential Review Committee that are relevant to the Department of Public Enterprises, in particular, the remuneration standards of state-owned companies.
7.2 consider fast-tracking the shareholder management bill to empower the Department to execute its shareholder management responsibility and oversight over state-owned companies.
7.3 consider introducing a comprehensive plan to expand the corporate social investments of SOCs to rural parts of the country.
7.4 develop a communication strategy for all state-owned companies, in order to promote the companies, educate and inform the public and rural communities about the work of SOCs and opportunities that they offer.
7.5 consider reallocating part of the recommendations on 60% of budget allocated for administration to the sector oversight programmes.
7.6 fill all vacancies in executive positions of state-owned companies and the within the Department of Public Enterprises within six months.
7.7 address stability at executive director’s levels of SOCs and respond to issues raised by the committee on corporate governance.
7.8 consider working with the Department of Trade and Industry and National Treasury in addressing localization strategies. These should include resetting of trade and investment cooperation to stimulate and support small-businesses and employment initiatives, reduce barriers to trade in services (which are often labor-intensive) and investments industrial value chains.
7.9 consider concerns raised by the ratings agencies on the Eskom’s future funding gaps and utilization of government guarantees.
7.10 develop a framework that would prohibit state-owned companies from challenging litigation cases which are not winnable.
7.11 provide the Committee with shareholder compacts on an annual basis and quarterly reports on how the companies are performing in achieving targets.
7.12 ensure SOCs accelerate transformation programmes, promote industrialization and support small and medium enterprises that are owned by women, youth and people with disabilities.
7.13 ensure that SOCs find a balance between advancing commercial and public mandate. They should not over-concentrate on the commercial mandate while neglecting the developmental mandate of transforming the economy and improving the quality of lives of South Africans.
7.14 ensure that the nuclear procurement plan to be undertaken by Eskom should not be pursued at all cost at the expense of the financial viability and sustainability of Eskom.
7.15 ensure transparency and accountability on the cost plus mines that have been financed by Eskom.
7.16 ensure issues relating to Safcol land claims are addressed expeditiously.
7.17 ensure that issues relating to the going concern of South African Express Airways are addressed.
7.18 ensure that public dispute between Denel and National Treasury are addressed with immediate effect.
7.19 work with the Department of Rural Development and Land Reform to ensure that the Richtersveld Mining Company and Communal Property Association are properly constituted to facilitate the R45 million payment to beneficiaries.
7.20 review the decision to re-appoint Mr Brian Molefe as the Group Chief Executive Officer of Eskom.
8. 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.
[1] National Treasury (2017)
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