ATC181031: Budgetary Review and Recommendation Report of the Portfolio Committee on Public Enterprises, dated 31 October 2018

Public Enterprises

Budgetary Review and Recommendation Report of the Portfolio Committee on Public Enterprises, dated 31 October 2018

The Portfolio Committee on Public Enterprises (hereinafter referred to as the Committee), having considered the performance of the Department of Public Enterprises for the 2017/18 financial year, reports as follows:

Introduction

Purpose of the BRRR

In terms of Section 5 of the Money Bills Amendment Procedure and Related Matters Act, No. 9 of 2009, the National Assembly, through its Committees, must annually compile the Budgetary Review and Recommendation Reports (BRRRs) that assess the service delivery performance of departments given available resources. Committees are also expected to provide an assessment of the effectiveness and efficiency of the Department’s use of available resources, and may include recommendations on the forward use of resources.

The mandate of the Committee is to consider legislation referred to it; exercise oversight over the Department and the seven State-Owned Companies (SOCs) that report to it; consider international agreements referred to it; consider the budget vote of the Department of Public Enterprises and its entities; facilitate public participation in its processes; and to consider all other matters referred to it in terms of legislation and the rules of the National Assembly.

The Department of Public Enterprises is the shareholder representative for government on 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 of these objectives. It is within this context that the BRR report concerning the Department of Public Enterprises by the Portfolio Committee on Public Enterprises is presented.

This report is a culmination of the Committee’s engagement and interactions with the Department and the State-Owned Companies that report to it. This entailed a very intense and thorough analysis of the strategy and operations of the Department and its entities through briefings, oversight visits and interaction with relevant stakeholders.

These included a briefing from the Department of Public Enterprises on its annual report on 5 September 2017, a briefing from the Office of the Auditor-General of South Africa (AGSA) on the audit outcomes of the Department and its entities on 4 October 2017, and deliberations on the analysis done by the parliamentary support staff on the financial and non-financial performance of the Department and its entities. The report incorporates inputs from the Internal Audit unit of the Department of Public Enterprises.

The Budgetary Review and Recommendation Report (BRRR) of the Committee contains the following:

Overview of the key relevant policy focus areas.
Summary of previous key financial performance recommendations of the Committee.
Overview and assessment of financial performance.
Overview and assessment of service delivery performance.
Financial and service delivery performance assessment.
Committee recommendations.

2. OVERVIEW OF THE POLICY ENVIRONMENT

The International Monetary Fund (IMF) consultation with South Africa states that, amid a marked growth deceleration, some of South Africa’s economic and social achievements after the end of apartheid have recently unwound. While the economy is globally positioned, sophisticated, and diversified, gaps in physical infrastructure and education create large productivity differentials across sectors. Low consumer and business confidence has dampened productivity growth. Fast growing debt has constrained policy space. As a result, per-capita growth has turned negative, the poverty rate stands at around 40 percent, unemployment has crept up to 27 percent—almost twice that level for the youth—and income inequality is one of the highest globally.

Fiscal and monetary policies were eased, but growth remained subdued. The financial year 17/18 consolidated fiscal deficit is estimated to have expanded to 4.8 percent of GDP from 4 percent of GDP in financial year 16/17. Monetary policy was eased by a total of 50 basis points, in July 2017 and March 2018. Nonetheless, GDP growth edged up only slightly from 0.6 percent in 2016 to 1.3 percent in 2017. Major obstacles to growth included a regulatory environment not conducive to private investment, inefficiencies in SOCs increasing the cost of key inputs, labour market rigidities, insufficient competition in product markets, corruption, and policy uncertainty. Inflation moderated to 5.3 percent and the current account deficit narrowed to 2.5 percent of GDP in 2017.

The recent political transition offers a renewed opportunity to advance reforms and exploit the economy’s potential. The stated priorities of the new administration—combating “state capture” and promoting jobs and growth—point in the right direction. On current policies, staff projects a modest growth recovery to 1.5 percent in 2018 and 1.8 percent in the outer years, slightly above population growth. Inflation is projected to ease to 4.9 percent in 2018 and edge higher to 5.5 percent in the outer years. The current account deficit is expected to widen to 2.9 percent of GDP in 2018 and to around 3½ percent of GDP over the medium term.

This baseline scenario is subject to upside developments, but downside risks seem more prominent. Should structural bottlenecks be addressed, South Africa has broad-based potential to boost growth significantly, aided by deep and liquid financial markets, a solid domestic investor base, a floating exchange rate, and limited susceptibility to exchange rate risk (low foreign currency exposures) and rollover risk (long debt maturities and access to segments of the global financial safety net). However, significant vulnerabilities arise from fiscal risks related to weak and poorly managed State-Owned Companies and other spending pressures.

External risks include large gross external financing needs, and a current account deficit financed by flows that are prone to sudden reversals in response to abrupt changes in global financial conditions and sovereign credit ratings. Disruption in trade flows and a fall in commodity prices would worsen the twin deficits and dampen growth.

2.3 Key Policy Focus for the Department of Public Enterprises

The Department of Public Enterprises oversee seven State-Owned Companies: Alexkor, Denel, the South African Forestry Company, Eskom, South African Airways, 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 (MTSF). 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.

This is a reaffirmation on how Government’s infrastructure programme will support the growth of supply sectors, unlock key bottlenecks in the economy and underpin structural transformation. The Strategic Infrastructure Projects (SIPs) identified in the Presidential Infrastructure Coordinating Council (PICC) in which State-Owned Companies are leading will have a catalytic impact on job creation, unlocking resources developing the poorest regions of our country and overcoming spatial inequalities. The SOCs have a regional outlook informed by government’s commitment to the African Union (AU) on the key Strategic Infrastructure Projects. The Department provides oversight to these entities to deliver on the developmental objectives of government and to ensure that they are commercially viable. SOCs contribute continental developmental objectives as part of government’s commitment to the AU’s Agenda 2063.

3. SUMMARY OF PREVIOUS YEAR BRR Recommendations MADE BY THE COMMITTEE

The Committee recommends that the Minister of Public Enterprises should:

Ensure the capacitation of the internal audit function in the Department and State-Owned Companies to improve record keeping, strengthen internal controls and compliance with the legislative framework.
Together with the Department of Planning, Monitoring and Evaluation (DPME), develop mechanisms for appropriate sanctions to discourage poor performance, particularly in the attainment of annual performance plan targets, budget planning and spending performance. The Department should also ensure that there are punitive measures in place for under-performance against targets for board members, executives, contractors of SOCs and officials.
Ensure that all critical, funded and vacant posts are filled timeously.
Immediately strengthen and improve the Department’s oversight effectiveness over its public entities with emphasis on the following:

Appropriate effective planning and budgeting processes are put in place;
The financial management, control structures and processes are such that accurate, timeous, reliable recording and reporting of all financial transactions takes place;
That the appropriate financial management systems and controls are in place to ensure effective management of the financial affairs of the entity;
That the financial affairs and performance of the entities as reported is acceptable in terms of the corporate plans and shareholder compacts;
Significantly enhance reporting and accountability arrangements that facilitate an appropriate oversight by the Department; and
Urgently develop technical capacity within the Department to oversee its public entities.
1. Ensure all State Owned Entities develop, set explicit targets and submit quarterly reports to the Committee on:

their cost containment programme, working capital management, infrastructure investment programme, procurement management strategy and effectiveness; and
programmes for supporting SMMEs inclusive of clear targets, rand values and their business efficiency programme.
1. Address concerns raised by the ratings agencies on Eskom’s future funding gaps and utilization of government guarantees.
2. Assist with the timeous resolution of land claims in conjunction with the Department of Rural Development and Land Reform, and ensure a sustainable future role for Safcol.
3. Create black industrialists and local industries through SOCs.
4. Increase and strengthen oversight over State-Owned Companies through robust and regular interaction with CEOs, Board Members, Audit Committees, regular visits to the construction sites of major infrastructure projects as well as to offices and sites of the entities.
5. Fast-track the introduction of the Shareholder Management Bill which will empower the department to carry out its oversight responsibilities over SOCs more effectively, especially in providing guidance on how to align SOCs’ strategic priorities with government policies. The Department should present the draft Bill to the Committee by the end of March 2018.
6. Provide the Committee with shareholder compacts signed with SOCs in order to enhance the oversight role of the Committee, within one month after the signing of the agreement.
7. Institutionalise the recommendations of the Presidential Review Committee on SOCs and implement the Inter-Ministerial Committee, headed by the Deputy President, looking into the SOCs and the Department.
8. Ensure that all the SOCs undertake interim audits, as most of them received qualified audit opinions with findings.
9. Ensure that the Department closely monitors South African Express Airways in the implementation of the turnaround strategy.
10. Ensure that the Department finalises the future strategic roles for Alexkor and Safcol timeously.
11. Pursue the finalisation of the whole of State policy to bring alignment and synergy among state aviation assets, i.e. SAA, Mango and SAX, together with the National Treasury.
12. Address issues relating to SOCs with going concern issues.
13. Provide the Committee with quarterly progress reports regarding the implementation of these recommendations.
14. Ensure that the Department submits a report to the Committee on its failure to fill vacancies, especially at management level, and what is being done to address this. This report needs to be submitted within three months after the adoption of this report by the National Assembly.
15. Ensure that the Department submits a report to the Committee on governance gaps with the SOCs, including governance structures, within three months after the adoption of this report by the National Assembly.
16. Ensure that the Department submits a report to the Committee on compliance by the SOCs with the procurement localisation strategy adopted by government of 75% local procurement. This report should be submitted to the Committee within three months after the adoption of this report by the National Assembly.
17. Ensure that Transnet submits, through the Department, a report of how the R8 billion expenditure programme in the Port of Saldanha Bay will be spent, including timelines. This report should be submitted within three months after the adoption of this report by the National Assembly.
18. Ensure that the Department submits an assessment on the ownership of SAX aircraft and how this will affect possible aircraft leases should the whole of State aviation strategy be approved.
19. Ensure that the Department provides a written response to the Committee on the above recommendations and the progress thereon within three months after the adoption of this report by the National Assembly.

The Committee recommends that the Minister of Finance should:

3.2.1 Ensure that the nuclear procurement plan undertaken by Eskom should not be pursued at the expense of the financial viability and sustainability of Eskom and of the country.

3.2.2 Ensure that a strategy to reduce SOCs’ reliance on government guarantees is adopted.

3.2.3 Ensure mechanisms for oversight over SOCs’ are implemented regulatory by agencies.

3.2.4 Together with the department of Public Enterprises, finalise the aviation whole of State policy and ensure implementation thereof as soon as possible.

3.2.5 Together with the Department of Public Enterprises, address the concerns regarding going concern issues pertaining to SOCs.

3.2.6 Provide a written response to the Committee on the above recommendations and the progress thereon within three months after the adoption of this report by the National Assembly.

4. OVERVIEW and assessment of financial performance

The Department of Public Enterprises spent 93.9 per cent of its budget in the 2017/18 financial year and received an unqualified audit opinion with no findings.

Table 1. Overview of Vote allocation and spending (2013/14 to 2017/18) R’million

Department of Public Enterprises (R'm)	Expenditure Performance For the Five Year Period Reviewed
Department of Public Enterprises (R'm)	2013/14	2014/15	2015/16	2016/17	2017/18
Allocation	294.1	322.9	23 303	268.0	266.7
Actual Expenditure	272.5	298.5	23 260	253.8	250.4
Percentage Spent	92.6	92.4	99.8	94.7	93.9
Percentage Unspent	7.4	7.6	0.2	5.3	6.1

Source: Department of Public Enterprises (2018)

As shown in the table above, in the previous five years the DPE underspent by more than 5 per cent for four of those years. The reason given for the underspending in the 2013/14 and 2014/15 financial years was mainly due to delays in filling vacant posts and delays in projects that have not yet commenced and other projects that still need to be completed. The under-expenditure of R16.3 million in the current year similarly is also due to vacancies which are as the result of the realignment of the organisational structure.

The department was allocated R266.7 million at the beginning of the 2017/18 financial year. The budget allocation was not adjusted during the Adjusted Budget Appropriation in October 2017. Of the allocated budget of R266.7 million, R250.4 million was spent, resulting in an amount of R16.3 million or 6.1 per cent not being spent. The unspent balance of R16.3 million will be surrendered to the National Revenue Fund (NRF).

Financial Performance 2017/18

Table 2. Quarterly Expenditure for the 2017/18 financial year

Programme (R'm)	2017/18				Final Appropriation
Programme (R'm)	1st Quarter	2nd Quarter	3rd Quarter	4th Quarter	Final Appropriation
Programme 1: Administration	30.2	74.1	111.9	150.6	158.5
Programme 2: Legal and Governance	4.2	9.2	13.9	21.6	24.2
Programme 3: Portfolio Management and Strategic Partnerships	14.1	31.5	46.0	78.2	84.0
Total	48.5	114.8	171.8	250.4	266.7
Percentage of Budget Spent	*18.2%*	*43.0%*	*64.4%*	*93.9%*	*100.0%*

Source: National Treasury (2017-2018) SCOA Reports

In the first quarter, April to June 2017, the department spent R48.5 million or
18.2 per cent of the R266.7 million budget Appropriated for the 2017/18 financial year. The department spent 19.7 per cent less than the R60.4 million it projected to spend. The slower than projected spending is a result of vacancies that were put on hold due to a departmental realignment process as well as delays in the commencement of some of the projects.

An amount of R48.1 million was spent on current payments, Compensation of Employees amounted to R34.2 million while Goods and Services amounted to R13.9 million. The majority of expenditure took place within the Administration programme mainly on compensation of employees and goods and services of R30.2 million. This was followed by expenditure of R14.1 million under the Portfolio Management and Strategic Partnerships programme and R4.2 million under the Legal and Governance programme. Expenditure was primarily on compensation of employees and goods and services. At economic classification level, slower than projected spending occurred on compensation of employees and goods and services. This was mainly due to delays in the filling of vacant posts where the vacancy rate stands at 14.1 per cent. Filling of vacant posts was put on hold due to a departmental realignment process which was nearing completion.

By the end of the second quarter, April to September 2017, the Department spent
R114.8 million or 43.0 per cent of the Appropriated Budget of R266.7 million, which represents a decrease of R3 million compared to the second quarter in the previous financial year. The department’s expenditure was primarily on Compensation of Employees and Goods and Services. An amount of R74.1 million or 47.7 per cent of its budget was spent under Administration programme mainly on Compensation of Employees and Goods and Services. Programme 3: Portfolio Management and Strategic Partnerships programme spent R31.5 million, a decrease of R3.9 million or 11.0 per cent from the previous year while the Legal and Governance programme spent R9.2 million, a decrease of R0.9 million or 7.1 per cent on the same period in the previous year. Both programmes primarily spent on Compensation of Employees and Goods and Services. The department was again slow in spending on compensation of employees as the vacancy rate remained high due to the filling of vacant posts that was put on hold pending the finalisation of the organisational realignment process.

The original budget of R266.7 million remained unchanged during the Adjusted Budget Process in October 2018. Virements amounting to R10.3 million from compensation of employees were shifted to goods and services for office relocation costs. The department had an available budget of R266.7 million of which R171.8 million or 64.4 per cent was spent by the end of the third quarter of 2017/18, a decrease of R3.7 million on the amount spent in the same period in 2016/17. The bulk of this amount was spent on compensation of employees and goods and services. The Administration programme spent 72.1 per cent of its budget by the third quarter of the 2017/18 financial year, mostly on compensation of employees and goods and services. Actual expenditure to the end of December 2017 for the programme Legal and Governance amounted to R13.9 million of the available budget of R24.2 million or 57.3 per cent of the budget has been spent. Expenditure in this programme decreased by R0.9 million or 6.1 per cent, year-on-year. The decrease is primarily due to delays in the commencement of some projects as well as vacancies that were put on hold due to a departmental realignment process. The Portfolio Management and Strategic Partnerships programme received R84 million and had spent 46.1 million or 54.8 per cent by the end of December 2016, a decrease of R9.5 million or
17.1 per cent year-on-year. By the end of the third quarter, actual expenditure was slower than projected. This was mainly due to lower than projected spending on compensation of employees due to delays in filling vacant posts as well as slow spending on goods and services due to projects that have been delayed. Compensation of employees amounted to R107.8 million against a budget of R156.9 million, while Goods and services amounted to R61.6 million against a budget of R106.6 million.

The department spent R250.4 million or 93.9 per cent from the available budget of R266.7 million by end of the 2017/18 financial year. This resulted in an underspending by R16.3 million of the adjusted budget. The underspending of R16.3 million was mainly due to underspending on Compensation of Employees of R14.7 million due to the suspension of vacant posts pending the organisational realignment. Underspending on Goods and Services of R1.5 million was a result of delays in the commencement of some of the projects.

During the Adjustment Budget the department effected shifts and virements amounting to R10.3 million. Programme 1 shifted funds within the programme from Compensation of Employees amounting to R7 million to Goods and Services for relocation costs; Goods and services of R320 000 to Households for employee social benefits. Programme 2 shifted funds from Compensation of Employees vacant posts amounting to R1 million to Programme 1 for Goods and Services for relocation costs. Programme 3 shifted funds from Compensation of Employees vacant posts amounting to R2 million to Programme 1 for Goods and Services for relocation costs. The department has not requested any roll-over of funds from the 2017/18 financial year to the current financial year.

The department has received an unqualified audit opinion with no findings in the 2017/18 financial year, similar to the previous year’s audit opinion.

4.3 Auditor-General Report

The department received an unqualified audit with no findings.

The department’s overall objectives are to provide an effective shareholder management system and to support and promote economic efficiency within each of the State-Owned Companies (SOCs). The performance of SOCs has been varied in the period under review. It is also important to note that the economic environment under which SOCs operate has been negative.

The financial performance is evidenced by the service delivery done by the entities and enumerated in Section 5. Section 5 highlights the performance of the entities in relation to the financial performance.

4.4.1 Alexkor

The entity reported a net profit of R31 million in 2016/17, an improvement on the loss it reported in the 2015/16 financial year. Consolidated revenue increased from R197 million in 2015/16 to R386 million in the 2016/17 financial year. Alexkor commissioned deep sea operations during the 2016/17 financial year, which improved carat production to over 162 000 carats being produced, compared to 45 000 carats produced in the previous financial year. The commissioning of the deep sea mining operations improved the performance of the joint venture significantly.

During the 2016/17 financial year, the entity received an unqualified audit opinion with findings. The entity seemed to have regressed from the previous’ years findings, as additional matters were raised concerning its pre-determined objectives which was not raised in the 2015/16 financial audit.

During the 2017/18 financial year, revenue declined by 46 per cent year-on-year as a result of a decrease in carat production due to a decrease in boat days. This was caused by unfavourable weather conditions affecting mid and deep sea mining and lack of production from International Mining and Dredging South Africa (Pty) Ltd (IMDSA). This was further exacerbated by the vessel that caught fire in April 2017 and the resultant cash flow operational shortage. The EBITDA (earnings before interest, tax, depreciation and amortisation) margin was not met due to the lower production.

The entity once again received an unqualified opinion for the 2017/18 financial year, with findings on its predetermined objectives, on compliance with legislation as well as internal control deficiencies.

4.4.2 Denel

During the 2016/17 financial year, the entity received an unqualified opinion with findings on its compliance with laws and regulations.

In a meeting with the Portfolio Committee on 06 February 2018, Denel advised the Committee that it was facing liquidity concerns over its indebtedness. Their operating cash was not adequate, and they had R350 million overdue to unpaid suppliers. The entity’s work was on hold as suppliers were not delivering due to outstanding payments. The number of incidents of irregular expenditure has also increased. Denel also advised the Committee that its financial statements and Annual report for 2017/18 would be delayed.

On the 18 September 2018, the Minister of Public Enterprises advised Parliament that Denel would not be tabling their Annual Report and the annual financial statements by 30 September 2018 as required by the PFMA. The Minister did not stipulate the length of the expected delay.

4.4.3 SAFCOL

During the 2016/17 financial year, the entity was still struggling with instability at management level with the entire Executive Committee positions vacant.The company was also unable to meet any of the strategic targets as agreed in the 2016/17 shareholder compact.Despite this the entity was able to grow revenue to R1 billion, the highest in five years.This 14 per cent growth in revenue is due to increased selling prices and volume of logs.This resulted in SAFCOL reporting an operating profit of R123 million and net profit of R107 million for the year.

SAFCOL is still overseeing Industrias Florestias de Manica (IFLOMA), its Mozambique subsidiary, which is still under care and maintenance, its future is still under discussion at SAFCOL. SAFCOL is currently implementing its own turnaround strategy. SAFCOL is still struggling to operate on land that is affected by land claims, which affects
61 per cent of the land SAFCOL operates.

However, the entity received a qualified audit during the 2016/17 financial year on its financials with material findings on its pre-determined objectives and compliance with laws and regulations. Emphasis of matters were raised concerning restatements and material losses of R41.8 million as a result of alleged fraud and corruption.

On the 28 September 2018, the Minister of Public Enterprises advised Parliament that SAFCOL would not be tabling their Annual Report and the annual financial statements by 30 September 2018 as required by the PFMA. The Minister did not stipulate the length of the expected delay.

4.4.4 Eskom

During the 2016/17 financial year Eskom was faced with leadership, governance and reputational damage which resulted in the entity receiving a qualified audit opinion based on that fact that Eskom could not adequately identify and recognise all irregular expenditure. Consequently, the auditors were unable to determine whether any adjustment was necessary to the balance of irregular expenditure stated at R3 billion in the financial statements.

In the 2017/18 financial year, Eskom once again received a qualified audit opinion based on the fact that Eskom could not adequately identify and recognise all irregular expenditure.Once again the auditors could not determine whether any adjustment was necessary to the balance of irregular expenditure stated at R19.6 billion in the financial statements.

4.4.5 Transnet

The entity’s focus for the 2016/17 year was on the continued implementation of the Market Demand Strategy (MDS).Transnet was able to achieve R21.4 billion capital investment for the year in the context of weak economic fundamentals. Despite the steep fall in commodity prices, stagnant global and domestic economic growth and a significant decline in customer demand, Transnet was able to achieve aggregate volume performance of 95 per cent, an increase on the 90.3 per cent achieved in the previous year. Transnet continued to demonstrate financial stability during the year, enabling it to continue the execution of the MDS, although at a slower pace due to the global economic slowdown.

Yet Transnet failed in 2016/17 to meet approximately 48 per cent of the performance targets it had set for itself, a further deterioration, as it failed to achieve 42 per cent in the previous financial year. T

Transnet received an unqualified audit with findings on their predetermined objectives and on compliance with laws and regulations in the 2016/17 financial year.With respect to compliance with laws and regulations the audit found that no effective and appropriate steps were taken to prevent irregular and fruitless and wasteful expenditure, which amounted to R922 million and R21.9 million respectively.

Although revenue and EBITDA improved for the entity, the company’s reputation has suffered due to allegations of financial mismanagement relating to the 2014 tender for the 1 064 locomotives. Three executives have been served notices of suspension with two executives being suspended.

During the 2017/18 financial year, the entity received a qualified audit opinion as the auditors were unable to obtain sufficient audit evidence that irregular expenditure was complete and accurate. Irregular expenditure is stated at R8.1 billion.Transnet also received findings relating to their predetermined objectives and on compliance with laws and regulations while internal control deficiencies were also identified.

4.4.6 South African Express Airways

At the time of tabling the Budgetary Review and Recommendation Report for 2017, the entity had not as yet tabled their 2016/17 Annual Report to Parliament due to the assumption of “going concern” which could not be guaranteed.

During the financial year the airline was granted an extension of an existing guarantee of R539 million and R567 million, which allowed them to table the 2015/16 Annual Report and Financial Statements.

The entity received a qualified audit opinion on the financial statements with material findings on their pre-determined objectives and compliance with laws and regulations for the 2015/16 financial year.

On 16 May 2018, the entity presented its unaudited 2016/17 financial report to the Portfolio Committee due to going concern issues. SA Express needs to be recapitalised to replace its aging fleet. The airline did not have sufficient cash flow to maintain the aging fleet, with so some aircrafts grounded. The airline’s liabilities are growing but its revenue was declining due to the unreliability of their aircrafts. The airline states that it requires a capital injection to return to profitability.

On the 18 September 2018, the Minister of Public Enterprises advised Parliament that SA Express would not be tabling their Annual Report and the annual financial statements by 30 September 2018 as required by the PFMA. The Minister did not stipulate the length of the expected delay.

4.4.7 South African Airways

On 19 December 2014 the President had transferred the administration of the South African Airways Act, 2007 from the Minister of Public Enterprises to the Minister of Finance due to the airlines liquidity issues.

On the 01 August 2018, the President transferred the administration of the South African Airways Act, and its accompanying functions, from the Minister of Finance back to the Minister of Public Enterprises. A proclamation to this effect was gazetted on 01 August 2018. This will enable the Minister to develop the optimal group structure for the state-owned aviation assets.

On the 18 September 2018, the Minister of Public Enterprises advised Parliament that SAA would not be tabling their Annual Report and the annual financial statements by 30 September 2018 as required by the PFMA. The Minister did not stipulate the length of the expected delay.

The department has an appropriated total budget of R273.9 million of which
R49.3 million or 18.0 per cent has been spent for the period April to June 2018. This is lower than the projected expenditure by 24.5 per cent for the first quarter. This compares less favourably on the R58.5 million or 18.2 per cent spent in the first quarter of the previous financial year. The Department has implemented a new budget structure for the 2018/19 financial year, approved by National Treasury.

The majority of the Department’s budget is spent on compensation of employees and Goods and services. Of the R171.4 million budgeted for compensation of employees, R32.48 million or 18.9 per cent has been spent. An amount of
R99.4 million has been allocated for Goods and Services, where R15.2 million or
15.3 per cent was spent in the first quarter. On compensation of employees, the Department has underspent by R10.2 million from a projected amount of
R42.6 million.

The majority of the budget was spent on the programme Administration. The programme has an appropriated budget of R152.0 million (55.5 per cent of the total budget), of which R29.6 million or 19.5 per cent has been spent by the first quarter. The low spending was due to delays in the commencement of some of the projects as well as vacancies that were put on hold as a result of a departmental realignment process.

Programme 2: State-Owned Companies Governance Assurance and Performance, previously Legal and Governance, had a budget of R39.1 million of which R8.1 million or 20.7 per cent of the budget was spent. The main cost driver within the programme were compensation of employees, and travel and subsistence. The programmes also spends significantly on consultants and is mainly driven by legal assistance from private firms for matters pertaining to the State Owned Companies.

Programme 3: Business Enhancement, Transformation and Industrialisation, previously Portfolio Management and Strategic Partnerships, has a budget of R82.9 million of which R11.6 million or 14.0 per cent of the budget was spent by the end of June 2018. The main cost drivers in the programme are compensation of employees, travel and subsistence and consultants mainly for projects which are run for effective oversight of state owned companies.

As at 30 June 2018, the department had a headcount of 173 which translates to a vacancy rate of 25.1 per cent. National Treasury notes that the department intended to implement a new organisational structure from April 2018. However, implementation was put on hold following change in leadership prior to the beginning of the new financial year.

Table 3. Current Estimates for the 2019/20 R’million

Programme Allocation (R'm)	2018/19	2019/20	Variance	Variance %
Programme 1: Administration	152.0	162.2	10.2	6.71%
Programme 2: State-Owned Companies Governance Assurance and Performance	39.1	42.3	3.2	8.18%
Programme 3: Business Enhancement, Transformation and Industrialisation	82.9	88.6	5.7	6.87%
Total	273.9	293.0	19.1	6.97%

Source: National Treasury (2018)

Table 3 illustrates the projected allocation for the 2019/20 financial year amounts to R293.0 million, a R19.1 million or 7.0 per cent increase. Programme 2: State-Owned Companies Governance Assurance and Performance will realise the biggest increase of 8.2 per cent from R39.1 million in 2018/19 to R42.3 million in 2019/20. Programme 1: Administration is projected to increase by 6.7 per cent while Programme 3: Business Enhancement, Transformation and Industrialisation increases by 6.9 per cent.

This allocation is subject to confirmation and approval by the Minister of Finance during the National Budget in 2019.

The Department has requested additional funds for the capital injection of
R1.740 billion, R21.7 billion and R2.8 billion in respect of the South African Express Airways (SA Express), South African Airways (SAA), and Denel. The details are as follows:

4.6.1. SA Express

SA Express has been facing a significant financial and operational challenges over the last seven financial years. This has persisted, resulting in continued poor financial performance by the entity. Although government issued the entity with a R1.1 billion guarantee to address the going concern status of the airline in terms of its insolvency, it has struggled to raise funding as lenders have been reluctant to issue further loans due to its high credit risk and weak balance sheet. This has severely constrained its liquidity position.

The airline’s financial position is weak. It had a negative equity of R284 million as at 31 March 2018 based on the management accounts. All the equity has been eroded due to losses incurred over the years. This means that raising further debt is unsustainable as the airline will further accumulate debt to service its debts.

4.6.2. SAA

SAA has been facing significant financial and operational challenges over the last several financial years. This has resulted in the continued poor financial performance by the entity. In order to turnaround this poor performance, SAA is currently undergoing a restructuring programme focused on enhancing revenue and reducing costs in order to steer the airline towards profitability and future growth. The greatest risk to the shareholder approved strategy is the ability of the airline to successfully execute the strategy and the funding thereof.

Given SAA’s insolvency and lack of profitability, the only way in which the airline’s capital structure can be rectified is a capital injection. This will address the insolvency, provide SAA with liquidity and enable the airline to repay some of the debt it is unable to service.

The funding will improve the airline’s financial position and address the current liquidity and solvency challenges, securing the company’s ability to continue operating as a going concern and enabling management to focus on the implementation of the turnaround strategy.

4.6.3. Denel

Denel is experiencing severe liquidity and solvency challenges which are adversely affecting the company’s viability and putting the company at risk. Denel management have reported that the entity is currently technically solvent, although the indicative financial results for the year ending 31 March 2018 show that the company had equity of more than R1 billion at year end. Denel is unable to meet its financial obligations with debts to suppliers mounting and operations halted across programmes and divisions. The company has no cash resources to repay its outstanding debt obligations.

The department supports that Denel be granted a recapitalisation of R2.8 billion. Over the past years, Denel’s growth and expansion of the business has been financed primarily by debt which has strained the company’s financial position. The only government support the company has received thus far is the extension of guarantees. Furthermore, the debt-to-equity position will improve significantly and allow the company to secure additional funding on the strength of its balance sheet to execute major contracts.

The department is financially sound as exhibited by achieving unqualified audit opinions with no findings for the last two years. However, actual expenditure tends to lag behind planned expenditure in the first two quarters of the year. This is only corrected once the Adjustment Budget is tabled in November. The reasons given for actual expenditure not meeting planned expenditure include: vacant posts due to suspension of filling posts pending the organisational realignment and the delayed commencement of certain projects. The department should try to correct this trend by looking at its planning mechanisms.

Performance against expenditure is addressed in Section 6 of the report, however, the department will have to strengthen its oversight of Eskom and engage on the best way for Eskom to utilise the yearly increase in electricity tariffs. Implementation of the South African Express turnaround strategy has to be monitored to ensure the desired results by the shareholder. The Department will have to maintain close oversight over Transnet’s implementation of the market demand strategy. The future role of Alexkor and SAFCOL will have to be confirmed with the continued stabilisation of their long-term planning. Denel will have to overcome the reputational damage incurred during the Denel Asia saga. The department is faced with entities that are facing financial instability and governance challenges. The department will have to strengthen its oversight and monitoring of these entities and engage National Treasury on ways to overcome the financial instability of these entities.

The department must provide the appropriate support to the SOCs to overcome the audit findings of 2017/18 in preparation for the 2018/19 financial audit. Corrective measures and plans need to be put to place to address the audit findings. The department needs to ensure that processes and procedures are put in place to address entities’ weaknesses timeously and effectively and efficiently before these issues escalate and become problems, which has been the case recently.

5. Overview and assessment of service delivery performance

5.1 Service Delivery Performance for 2017/18

The Department of Public Enterprises provides a distinct mandate of SOCs’ shareholder oversight on behalf of the State. 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 in driving the State’s strategic objectives of creating jobs, enhancing equity and transformation. The department’s contribution towards government priorities and outcomes is achieved through three programmes identified in the organisational structure namely: administration, legal and governance; and programme management and strategic partnerships. The section below discusses programme performance.

Performance Information by Programme

Programme 1: Administration

a) Purpose

Provides strategic management, direction and administrative support to the department, which enables the department to meet its strategic objectives.

The programme includes the Ministry, the Office of the Director-General and Support Services. The programmes currently comprises the following sub-programmes: Ministry; Corporate Services; the Chief Financial Officer; Human Resources; Communications; Strategic Planning, Monitoring and Evaluation and Inter-Governmental and Internal Relations and Internal Audit.

b) Programme performance

The department reports non achievement on one strategic objective on this programme which is, to promote institutional alignment in the execution of the oversight function. All performance indicators linked to this strategic objective were not achieved.

c) Committee Observations

The Committee observed that the strategic objectives identified do not consider sub-programmes identified by the department in its programme overview. In previous year the Committee emphasized that the department should include other sub-programmes in its planning and annual reporting framework.

Programme 2: Legal, Governance and Risk

a) Purpose

Provide legal services and corporate governance systems, as well as facilitates the implementation of all legal aspects of transactions that are strategically important to the department and SOCs, and ensures alignment with Government’s strategic intent.

b) Programme performance

The programme identifies two strategic objectives. The department reports achievement on the completion of the achievement of liquidation of Aventura. The programme did not achieve the strategic objective on the promotion of the development of a strong shareholder. The strategic objective’s target is to develop the shareholder draft bill for shareholder management. The Department states that it is in the process of consulting with the Department of Planning Monitoring Evaluation (DPME) on the Socio-Economic Impact Assessment System (SEIAS) prior to approval of the concept paper on government shareholder management policy by Cabinet.

c) Committee Observations

There is a need to improve governance in SOCs. The Department has a responsibility of outlining ongoing investigations in SOCs and to report progress made on cases to the Committee. Risk management practices must be strengthened in all SOCs. In terms of legislation, there are differences in board and sub-committee requirements for the SOCs based on their founding legislations. The Public Finance Management Act No 1 of 1999 (PFMA) requires the board to form an audit committee. The Department should set SOCs strategic objectives through the shareholder compact and ensure the audit committees are established.

The department needs to effectively utilise the PFMA to hold public servants accountable for how they spend public money. The Committee notes that the PFMA aims “to regulate financial management in the national government and provincial governments, to ensure that all revenue, expenditure, assets and liabilities of those government are managed efficiently and effectively, to provide for the responsibilities of persons entrusted with financial management in those governments; to provide for the matters connected therewith”. No deviations should be reported on the implementation of the PFMA by department and SOCs.

5.2.3 Programme 3: Portfolio Management and Strategic Partnerships

a) Purpose

To align the programme to the strategies of SOCs with government policy and strategy. It also aimed to align shareholder oversight with Government’s overarching economic, social and environmental policies, and build focused strategic partnerships between SOC, strategic customers, suppliers and financial institutions.

The sub-programmes in this programme are as follows:

Energy Enterprise – includes Eskom.
Manufacturing Enterprises – includes Denel, Alexkor and SAFCOL.
Transport Enterprises – includes South African Express (SA Express) and Transnet.
Economic Impact and Policy Alignment – aligns SOCs with overarching government economic, social and environmental policies.
Strategic Partnerships – to ensure SOCs’ commercial sustainability and attainment of desired strategic outcomes and objectives by SOCs.

b) Energy Enterprises

The Department reports achievement on all three strategic objectives under this sub-programme which are the following; ensure improved and sustainable operations within Eskom, delivery of Eskom’s build programme, and financial sustainability.

The financial year was challenging for Eskom’s financial performance, the qualified audit opinion at the end of the 2016/17 financial year, coupled with corporate governance failures restricted the ability to access the capital markets to execute the borrowing plan. Furthermore, the NERSA decision to grant Eskom tariff increases that are below average inflation for two consecutive years (2.2% in 2017/18 and 5.23% in 2018/19) coupled with the declining demand of electricity contributed significantly to the decline in revenues failing to meet operational costs and debt repayment obligations.

In that context, a deep dive exercise into Eskom’s cost structure was undertaken and the cost drivers were identified. The recommendations emanating from the exercise were used as base to review Eskom’s cost structure and business operating model which has formed the basis of the company’s strategic review to deal with financial sustainability and repositioning the company for growth whilst responding to the energy challenges landscape.

The changing energy landscape necessitated an understanding of the energy evolution and the review. The Department commissioned a number of studies with a view of re-positioning Eskom to ensure future relevance and sustainability. Furthermore, the Department played a critical role in the stimulation of the dwindling demand by supporting Eskom on their initiative to develop a Special Pricing Agreement for large energy users to ensure that they are supported during the difficult economic environment. It is envisaged that the spinoff will be the protection of jobs that were on the brink of being lost due to closure of the plants by intensive users. Eskom’s operational performance remains robust with the electricity capacity increasing by 2 387 MW through commercialisation of Medupi Unit 5 and 4, and Kusile Unit 1. The plant availability improved to 78% (2016/17: 77.3%) in the 2017/18 financial year demonstrating the improved plant maintenance and increased capacity due to the acceleration on delivering infrastructure Build Programme.

c) Committee Observations

The Department should continue to develop strategies for financial sustainability of Eskom. An intergovernmental approach should continue to be implemented with regards to municipalities’ debt recovery. The NDP objectives on the role and effectiveness of sector regulators need to be reviewed.

The Department of Energy introduced the Integrated Resource Plan (IRP) 2018 targeting the optimisation of energy mix. The Department of Public Enterprises needs to outline the role of Eskom in the attainment of the programme objectives.

The International Monetary Fund reports higher net operating costs worsened Eskom’s indebtedness, raised financing costs, and increased the risk to the sovereign. Despite the above-inflation tariff adjustments in part to cover its investment program Eskom produces at a loss and its paper is rated as sub-investment. Notwithstanding a R23 billion (0.5 percent of GDP) state bailout and the transformation of an earlier R60 billion (1.2 percent of GDP) subordinated loan into equity in 2015, and state guarantees of R350 billion (7 percent of GDP), Eskom has increased its reliance on financing from development finance institutions. Eskom’s debt to equity ratio is above 70 percent and it needs R60–80 billion (1½ percent of GDP) per year for the next five years to cover its capital spending. Eskom’s liquidity is under increasing pressures, and the spread on its international bonds is about 490 basis points relative to the benchmark as of end-June.

The concerns regarding the deteriorating governance and Eskom’s solvency brought the company to the brink of default in early 2018. The appointment of a new board and management restored the access to the market, and the clarification of the role of the tender committee in contract allocations is expected to contain slippages.

The Committee conducted an oversight inquiry into Eskom after allegations of misconduct involving some executives and board of directors were raised by the former Public Protector, Advocate Thuli Madonsela in her “State of Capture” report. Subsequent to the report executive and directors actions were questioned with regards to their role in upholding governance principles, the mandate of the organisation and implementation of legislative prescripts.

5.2.4 Sub-programme – Manufacturing Enterprises

This programme includes Denel, Alexkor and South African Forestry Company (Safcol). It further provides the Minister with operational, operational and capital programme analysis for planning, monitoring and evaluation of SOCs’ performance. All the strategic objectives in this sub-programme were achieved.

a) Sub-programme performance

The Department lists two strategic objectives which were achieved for this sub-programme which are to promote commercial viability of SOCs operations and position SOCs to support reindustrialisation of the South African economy.

b) Denel

The 2017/18 financial year was the most difficult decade for the SOC. The entity experienced crippling liquidity challenges that affected operations and delivery of key projects. The SOC had to request not only the rollover of existing guarantees (R1.85 billion), but had to request additional guarantees (580 million) for emergency capital requirements. As a result, the SOC is expected to reverse the trend of growing revenue and profitability. The situation remains grim with many suppliers remaining unpaid and a number of contracts running behind schedule. A new Board was put in place at the beginning of the 2018 financial year. The Board is mandated to drive a turnaround of the business and to improve stakeholder environment which is key to the sustainability of SOC.

c) Committee Observations

The introduction of the new board is a step in the right direction towards instilling governance in the SOC. The Committee note National Treasury projections that revenue is expected to decrease further, to R8 billion, in 2017/18 and remain constant over the MTEF period. In order to enhance revenue generation, Denel will focus on contracts that provide increased margins, and expand the export base and strategic partnerships to further improve market access. The Committee is concerned about Denel’s inability to complete and submit to Parliament its audit outcomes. The Auditor General states that the financial statements were received on 31 July 2018. Denel was still negotiating with lenders to address going concern challenges since they could not submit Annual Financial Statement (AFS) with an ongoing concern assumption.

d) Alexkor

Alexkor Richtersveld Mining Company Pooling and Sharing Joint Venture (Alexkor RMC PSJV) commenced with the exploration of new shallow water channels which were previously unexplored. Over 6 000 carats were produced against the target of 5 000 carats at the shallow water operations. Despite the introduction of new diamond mining operations, Alexkor RMC PSJV did not achieve its targeted annual production of 57 000. The diamond operations achieved 48 434 carats. Diamond revenue decreased from R386m to R209m in 2017/18. The decline in revenue was further exacerbated by the disruption of the deep sea mining operations. The deep sea mining vessel caught fire in April 2017, which resulted in extensive damages. The deep sea operations are expected to second quarter of 2018/19.

e) Committee Observations

In 2017 the Committee was concerned with the future sustainability of the entity, as diamond production is predicted to fall during the next financial year. Additionally, according to the Deed of Settlement, Alexkor needs to have a sustainable strategy as their 51% shareholding of the company needs to be transferred to the community in a socially responsible manner. The issues surrounding the payment of R45 million to the community also needed to be resolved. The resolution will assist communities with projects identified for socio-economic upliftment of communities in Richtersveld. The Auditor General reports that there in a regression in financial management and performance management and governance in the SOC.

f) Safcol

The Group had the most challenging year with revenue declining by approximately 20% for the 2017/18 financial year as result of poor performance. Furthermore, SAFCOL failed to deliver on agreed annual strategic projects due to the indecisiveness of the Board. However, the company indicated that they are in the process of reviewing its Corporate Strategy in an effort to improve performance. During the year under review, the SOC successfully hosted the first Forestry Industrialisation Conference in collaboration with government. Despite the decline in performance, SAFCOL remain stable and able to sustain itself without government financial support. The SOC has continued to invest in surrounding communities whilst waiting for the Department of Rural Development and Land Reform to finalise the settlement of the land claims.

g) Committee Observations

The Committee is concerned about SAFCOL’s inability to complete and submit to Parliament its audit outcomes. The Auditor General indicated that the reason for failure to complete the audit report is due to failure to receive financial information from the Mozambican entity IFLOMA. The issues on land claims is a concerned as no progress is reported annually. A mechanism through interface of Ministers, Economic Sectors, Employment and Infrastructure Cluster and a Cabinet decision required to resolve this impasse should be obtained within the current financial year.

5.2.5 Sub-programme – Transport Enterprise

This sub-programme includes South African Airways (SAA), South African Express (SAX) and Transnet. The purpose is to align corporate strategies of Transnet and SAX with Government’s strategic intent and benchmark their financial and operational performance. All the strategic objectives in this sub-programme were achieved.

a) Transnet

Transnet continued to demonstrate solid performance in the 2017/18 financial year that depicted growth in various sectors of land, freight and logistics sectors. This performance demonstrates Transnet’s commitment to stimulate economic activity in various sectors of the economy, which led to growth in the following strategic sectors:

6,1% increase in port containers.
Record general freight volumes of 90,8mt, an increase of 3,1% from the prior year.
7,4% growth in rail containers and automotive volumes.
17,5% growth in chrome.
13,2% increase in manganese.
Record of 77,0mt export coal volumes (RBCT).

The Department emphasised the importance of Transnet’s performance on the general freight corridors in support of the Road-to-Rail Migration Strategy. This initiative has resulted in over 3.6% performance increase compared to the prior year. However, it is still expected that Transnet can improve the operation of inland terminals and better collaborations with the road freight sector to mitigate the transport externalities challenges that impede the effective and efficient movement of freight in South Africa. The increase in the export of coal through the Port of Richards Bay hit a record of 77 million tons. It should also be noted that Transnet continues to increase the transportation of rail addressable freight by rail towards the target of 330 million tons as prescribed in the Medium-Term Strategic Framework. Despite the increase in port containers, the productivity and efficiency gains through port system was not reaching desired performance targets as per the Shareholders’ Compact. The Port of Durban’s container terminal container continues to experience challenges in turning around vessel efficiently due to the continued construction and storm experienced in the third quarter of the year under review.

b) Committee Observations

The MDS remains a priority for Transnet. Since its inception more than R145 billion has been spent on projects including the expansion of South Africa’s rail, port and pipeline freight infrastructure network. Governance challenges have been stabilised in the SOC through the appointment of new board. Some of the focus areas which the new board introduced to deal with the following:

Appointment forensic specialists to review the reports prepared relating to the much-talked about 1 064 locomotives contract, where Transnet has been accused of mismanaging the supply-chain management process resulting in associated costs increasing from approximately R38 billion to R54 billion.
Formulated the key governance sub-committees of the Board.
Abolished the ‘Acquisitions and Disposals’ (ADC) subcommittee, as they want to minimise Board interference in procurement processes.
Commenced interactions with key state institutions charged with investigating “state capture”.
Reviewed the progress of the investigations instituted by management, relating to payments made to companies identified in various media reports.

Transnet has regressed in its audit outcomes. The Auditor General raised concerns on its internal controls, declining financial health and losses and irregular expenditure and supply chain management.

c) South African Express

DPE and SA Express continue to engage with various stakeholders to secure funding to sustain the entity and to develop turn-around initiatives. The finalisation of the airline’s 2016/17 audit was delayed due to the airline being 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 signing off on its annual financial statements, as required by section 4 of the Companies Act (2008). The airline reported revenue of R2.3 billion in the 2015/16 unaudited annual financial statements compared with the audited revenue of R2.4 billion in 2016/17. Operating expenses increased from R2.3 billion in 2015/16 to R2.5 billion in 2016/17, mainly due to an increase in operating leases of R282 million, which were aimed at minimising the impact of the technical disruptions to the revenue stream and the operational stability of the airline. The adverse financial performance is attributable to the marginal decrease in revenue, coupled with a higher cost structure.

d) Committee Observations

The airline’s going concern status is a concern. The airline needs to be recapitalised in order for it to be sustainable going forward.

5.2.6 Sub-programme – Economic Impact and Policy Alignment

The purpose of this sub-programme is to align shareholder oversight of SOCs in relation to overarching government economic, social and environmental policies and implement strategic interventions to contribute towards achievement of national objectives in support of economic growth and transformation. The sub-programme achieved on the position SOCs to support the reindustrialisation of the South African economy whilst recorded non-achievement on the development of black industrialists.

a) The Black Industrialist Programme

The Black Industrialist Programme entailed the development of Black Industrialist business cases to leverage on SOC procurement and industrial capability for consideration within the DTI support programme through the partnership between the two departments. A Business Development Unit (PMU) managed under the Central University of Technology Innovation Services (CUTs) together with the Enterprises Unit of the University of Pretoria were commissioned for undertaking this exercise. In this regard, the knowledge and experience of the universities were channelled towards the project. The crux of this initiative was to provide leadership to maximise the focus on growing the number of start-up enterprises that becomes industrialist and create much needed jobs. The enterprises are to be supported through consideration of business cases with the potential to create manufacturing footprint of products and services with demand from the SOCs, thus giving a tangible expression to accelerating transformation of the South African economy. The creation of these industrialists will create jobs.

b) The Enterprise Development Programme

Specific interventions undertaken entailed reviewing procurement solicitations to maximise opportunities for SMMEs, using targeted assistance mechanisms, including suggested alternative procurement packaging to optimise opportunities for SMMEs. The nature of interventions begged on two important virtues, the importance of building creative solutions as well as the importance of collaborations. The former was made possible through the mutual engagement of the various Fora for Transformation as per the Departmental Transformation Framework and Guidelines (TFG) document. The document supplicates the Department to focus on four areas for Transformation, namely: Job Creation, Skills Development, Enterprise Supplier Development (ESD) and Corporate Social Investment (CSI). Furthermore, the document proposed mechanisms for relationship-building to make it possible to gain information about the individual SOCs with regard to the four elements of transformation. With regard to collaborations, the Department lurched on the Memorandum of Understanding with the Department of Small Business Development (DSBD) whose intention is to facilitate joint cooperation in the delivery of, among others, pragmatic guidance and related interventions to heighten SMME support by SOCs in DPE’s portfolio. DPE will therefore continue embarking on initiatives within this relationship with DSBD to realise the objectives of the MOU and to coordinate efforts to build growing support for SMME development.

5.2.7 Sub-programme – Strategic Partnerships

The purpose of the sub-programme is to drive relationships between SOCs, key customers and supplier sector to transform sectoral and social composition of the economy. The sub-programme reported achievement on fast tracking delivery of build programme while it didn’t achieve on the strategic goal on ensuring SOC financial sustainability.

a) Funding Mechanism

Aligned with the strategic objective of the Department of ensuring financial sustainability of SOCs, unit has conducted a benchmark study on international best practices in the area of funding and investment decisions. The work has culminated into a risk management framework and proposal for codification of different types and modelling of capital structures of SOCs.

The sub-programme has achieved on its strategic objectives on SOC’s financial sustainability and overseeing the implementation of infrastructure programmes within SOCs. There were no deviations reported on the programme.

b) Project Oversight

The Executive Forum for SIPs 09 and 10 chaired by the Minister of Public Enterprises has assisted by ensuring that there is sufficient energy in the country. Moreover, the country has experienced supply leading to improved exports of electricity to neighbouring countries, thus contributing to economic integration and development. The achievements include the commercial of units 5 and 4 of Medupi Power Station as well as the commercial operation of Unit 1 Kusile Power Station. The achievements have 2 888 MW to the Eskom Grid. Subsequent to the commercial operation above, the utility has also synchronised Kusile unit 2 on 24 March 2018 and Medupi unit 3 on 8 April 2018.

With regard to household electrification for the 2017/18 financial year, Eskom achieved 215 519 connections against a target of 214 097 and municipalities achieved 42 833 connections including rollovers. A total of 722, 3 km of transmission network have been installed for the 2017/18 financial year exceeding a target of 677 km. The shareholder compact target for MVAs of 2 010 has also been exceeded, whereby the utility has constructed 2 510 MVAs. This indicates that the Turnaround Strategy implemented by Eskom since 2015 is delivering positive results.

c) Committee Observations

The department needs to ensure that the financial sustainability of SOCs remain a priority. The Committee identified significant vulnerabilities arise from SOCs related fiscal risks and large gross external financing needs. Other risks relate to materialisation of SOCs contingent liabilities and continued growth in SOCs debt. The changes in SOC management and boards such as Eskom, Denel and SAA is a positive step towards addressing governance challenges and combating corruption. It was also noted that higher expenditure is the result of governance problems resulting in excessive procurement expenses and cost overruns related to investment projects. Eskom is one of the SOEs adversely affected by “state capture”. Several analyses, including official ones, state that Eskom’s deteriorated governance and procurement structures led to renegotiation of several contracts, side lining previous long-term suppliers in favour of a new provider with limited experience, who delivered inferior quality coal at a higher price. Moreover, there were various departures from the PFMA with conflicts of interest as a segment of Eskom staff engaged in procurement and service delivery to Eskom. The internal capacity was wound down and key services were outsourced to consultancy firms at inflated costs.

In 2017, the Department indicated that it had completed its organisational re-alignment exercise to strengthen and enhance the existing structure. The re-alignment process sought to drive operational efficiencies to improve the Department’s ability to support its oversight functions of the SOCs. The Department’s initiatives to reform governance of the SOCs informed the review of the organisational architecture to determine the extent to which the Department is structurally configured to deliver on its mandate. The development of the business case for the organisational architecture and the post establishment structure was finalised.

The vacancy rate for the year 2017/18 was at 13.4% with a turnover of 11.5%. The department did not perform well in recruitment process, some critical posts remain vacant and the delay in finalising the process led to non-compliance with the Policy on Recruitment and Selection timeframes.

6. Service Delivery and Financial Performance Assessment

In 2017, Cabinet approved remuneration and incentive standards for non-executive directors, executive directors and prescribed officers of State-Owned Companies. To ensure that these standards are maintained and strengthened, the department is in the process of drafting the Shareholder Management Bill, which is expected to be finalised in 2018/19.

In 2017/18, the department initiated an organisational process aimed at realigning its functions to enable it to perform its oversight role with greater efficiency. The department expects to implement its realigned organisational structure in April 2018. Carrying out the oversight function involves extensive travel and the use of consultants. Spending on these items, along with spending on compensation of employees, which is set to increase at an average annual rate of 8.1 per cent, from R156.9 million in 2017/18 to R198.3 million in 2020/21, constitute the department’s largest cost drivers.

The department’s overall spending on goods and services is expected to increase at an average annual rate of 1.3 per cent, from R106.6 million in 2017/18 to R111 million in 2020/21. Spending on goods and services comprises travel and subsistence, which increases from R13.4 million in 2017/18 to R19.6 million in 2020/21; and consultants, which decreases from R46.2 million in 2017/18 to R36.1 million in 2020/21. As per Cabinet’s decision to lower the aggregate national expenditure ceiling, allocations to the Administration programme have been reduced by a total of R10.4 million over the MTEF period, mainly on consultancy services in line with cost containment measures. This is not expected to have a negative impact on the department’s performance as its personnel will conduct certain activities that were previously outsourced to consultants. The department’s oversight activities are mainly funded in the State-Owned Companies Governance Assurance and Performance; and Business Enhancement, Transformation and Industrialisation programmes. The combined budget for these programmes is expected to increase at an average annual rate of 7 per cent, from R114.3 million in 2017/18 to R140 million in 2020/21.

7. Concluding Remarks

The management and board of directors of Eskom, Denel, SAA, and other SAX were changed following governance concerns. This improvement instils confidence and actions taken to strengthen SOCs’ governance. Governance in SOCs will translate in efficient use of resources and rebuilding trust. The department should continue on a path of inclusive growth and ensure that the SOC environment is transformed. Transformation initiatives should focus on improving the procurement and financial stability aspects of SOCs. In 2017 Denel has suffered from governance lapse. Some SOCs did not submit audit outcomes, three out seven SOCs submitted annual financial statement to the Auditor General. The reasons for non-submission of annual financial statement in SOCs were related to going concern status and non-complete financials assessment of subsidiary. The Committee is concerned with the audit results in the SOCs, particularly with the reported R27, 746 billion irregular expenditure that has been reported at Eskom and Transnet.

The Department has a role in ensuring that audit outcomes of SOCs are implemented. The Auditor General reported allegations of financial or Supply Chain Management (SCM) misconduct.

The matters emanating from the Portfolio Committee oversight inquiry into Eskom should be considered and implemented. The oversight inquiry deliberations uncovered lapses in Eskom governance with regards to the following:

The role of the executive authority in strengthening governance and oversight in the entity.
The role of board of directors and committees in discharging their mandate and avoiding conflicts of interests.
The role of executive and board of directors in violations of the Public Finance Management, other legislative prescripts and Eskom mandate.
The strength of governance policies covering business areas such as procurement and financing.
Delegations frameworks and policies including thresholds of approvals from Executive Authority, the Board, Chief Executive Officer and Chief Financial Officer.
The implementation of human resources policy in areas recruitment and remuneration.
Risk management policies applied politically exposed persons (PEPs).

8. Summary of Reporting Requests

The Auditor-General reported that the Department’s achieved a clean audit with no findings. Therefore, there are no reporting requests relating to the Department.

9. BRRR Recommendations of Committee: 2015, 2016 and 2017

RECOMMENDATIONS OF 2015	RECOMMENDATIONS OF 2016	RECOMMENDATIONS OF 2017	Description and Comments
Audit
1.Capacitate the internal audit function in the Department to ensure an improved record keeping and compliance with the legislative framework; 2. Increase oversight over state-owned companies through robust and regular interaction with CEOs, Board Members, Audit Committees, regular visits to the construction sites of major infrastructure projects as well as to offices and sites of the entities;	1.Capacitate the internal audit function in the Department to ensure an improved record keeping and compliance with the legislative framework; 2. Increase and strengthen oversight over state-owned companies through robust and regular interaction with CEOs, Board Members, Audit Committees, regular visits to the construction sites of major infrastructure projects as well as to offices and sites of the entities. 3. Ensure that all the SOCs undertake interim audits, as most of them got unqualified audit opinions with findings. 4. Ensure that there are time frames to rectify the shortcomings as identified by the findings of the Auditor General be set and given to the Committee.	1. Ensure the capacitation of the internal audit function in the Department and state-owned companies to ensure an improved record keeping and compliance with the legislative framework. 2. Increase and strengthen oversight over state-owned companies through robust and regular interaction with CEOs, Board Members, Audit Committees, regular visits to the construction sites of major infrastructure projects as well as to offices and sites of the entities. 3. Ensure that all the SOCs undertake interim audits, as most of them got unqualified audit opinions with findings 4. Address issues relating to SOCs with going concern issues.	The Department has shown improvements while SOCs have regressed. The Auditor General acknowledges that in some SOCs there is no internal audit function. The department reported compliance and achievement on oversight and project management. Interim audits were not reported to the Committee. Audit action plans recommended by the AG are not implemented by SOCs. Not addressing going concerns have led to deterioration in SOC environment.
Planning
3. Review the annual performance plan of the Department to ensure that the pre-determined objectives are measurable and quantified; 4. Ensure that there is a direct correlation and alignment between the annual performance plan and the annual reporting format. 5. Consider introducing relevant systems as well as considering evidential requirements during the annual strategic planning process in order to ensure that all predetermined targets are achieved. 6. Ensure that there are improvements in integration, harmonisation and alignment of planning and implementation across all three spheres of government and SOCs.	5. Consider introducing relevant systems as well as considering evidential requirements during the annual strategic planning process in order to ensure that all predetermined targets are achieved and that targets are realistic and achievable. .	5. Together with the Department of Planning, Monitoring and Evaluation develop mechanisms for appropriate sanctions to discourage poor performance, especially in ensuring that the attainment of targets in the annual performance plans are aligned to budget planning and spending performance. The Department should also ensure that there are punitive measures in place for under-performance against targets for board members, executives, contractors of SOCs and officials of the department. 6. Appropriate and effective planning and budgeting processes are put in place;	Departmental planning has improved. Budget process in department is in place. No submission were made to the Committee on punitive measures to discourage poor performance in SOCs.
Organisational/Hunan Resources
	6. Ensure that the vacancies in the department are filled, as well as the acting positions in the entities with an outcome of developing the strategic capacity of the Department. 7. That the Business Process Mapping exercise objective to be completed.	7. Ensure that all critical, funded and vacant posts are filled timeously. -Urgently develop technical capacity within the Department to oversee its public entities. -Urgently develop technical capacity within the Department to oversee its public entities.	Filling of vacant posts in the department is still a challenge. New organisational structure introduced to respond to mandate.
Governance
7. Consider introducing the Shareholder Management Bill which will empower the department to carry out its oversight responsibilities over SOCs more effectively, especially in providing guidance on how to align SOCs’ strategic priorities with government policies 8. Consider providing the Committee with shareholder compacts signed with state-owned companies in order to enhance the oversight role of the Committee. 9. Consider institutionalisation of the recommendations of the Presidential Review Committee on SOCs. 10. Ensure that the guiding frameworks for SOCs are completed timeously and implemented so as to provide a stable working environment. The Department should ensure that the SOCs comply with these frameworks.	8 Fast-track the introduction of the Shareholder Management Bill which will empower the department to carry out its oversight responsibilities over SOCs more effectively, especially in providing guidance on how to align SOCs’ strategic priorities with government policies. 9. Provide the Committee with shareholder compacts signed with state-owned companies in order to enhance the oversight role of the Committee, within one month after the signing of the agreement. 10. Institutionalise the recommendations of the Presidential Review Committee on SOCs and work with the Ministerial Committee, headed by the Deputy President looking into the SOC’s and the Department. 11. Ensure that the guiding frameworks for SOCs are completed timeously and implemented so as to provide a stable working environment. The Department should ensure that the SOCs comply with these frameworks. 12. Finalise the future strategic roles for Alexkor and Safcol. 13. Pursue the finalisation of the whole of State policy to bring alignment and synergy among state aviation assets. i.e SAA, Mango and SAX. 14. Ensure that the Department continues to work closely with policy departments such as the Departments of Transport, the Department of Mineral Resources, the Department of Energy, the Department of Defence and Military Veterans and the Department of Agriculture, Forestry and Fisheries, in order to influence the policy environment in which the SOCs operate	8. Fast-track the introduction of the Shareholder Management Bill which will empower the department to carry out its oversight responsibilities over state-owned companies more effectively, especially in providing guidance on how to align SOCs’ strategic priorities with government policies. 9. Provide the Committee with shareholder compacts signed with state-owned companies in order to enhance the oversight role of the Committee, within one month after the signing of the agreement 10. Institutionalise the PRC recommendations on SOCs and work with the Ministerial Committee, headed by the Deputy President looking into the SOC’s and the Department. 11. Ensure that the Department finalises the future strategic roles for Alexkor and Safcol timeously. 12. Pursue the finalisation of the whole of State policy to bring alignment and synergy among state aviation assets. i.e. SAA, Mango and SAX, together with the National Treasury.	Shareholder Management Bill not yet introduced. No shareholder compacts were made available to the Committee. No clear plan on institutionalisation and implementation of PRC recommendations. Guiding frameworks on SOCs not submitted. Future role of Alexkor and SAFCOL not outlined. The whole of State policy not introduced. Areas of policy alignment not fully addressed.
Financial
		13. Emphasise that the appropriate financial management systems and controls are in place to ensure the effective management of the financial affairs. 14. Address concerns raised by the ratings agencies on the Eskom’s future funding gaps and utilization of government guarantees. 15. Emphasis that financial management and control structures and processes are such that accurate, timeous and reliable recording and reporting of all financial transactions takes place.	Financial management systems not fully implemented. Strategy not presented to Committee. Non submission on annual reports in some SOCs.
Monitoring and Reporting
11.Ensure that emphasis is placed on monitoring that the SOCs’ implementation of Government’s policy objectives is realised, especially their outcomes as they have an impact on peoples’ lives; .	14. Ensure that emphasis is placed on monitoring and evaluation, so that the SOCs’ implementation of government’s policy objectives is realised, especially their outcomes as this has an impact on peoples’ lives. 15. Ensure that there are punitive measures in place for underperformance against targets for board members, executives, contractors of SOCs and officials of the department. 16. Ensure that the Department closely monitors SAX in the implementation of the turnaround strategy. 17. Introduce mechanisms that would ensure SOCs implement the recommendations of the department.	16. Provides the Committee with quarterly progress reports regarding the implementation of these recommendations 17. Significantly enhance reporting and accountability arrangements that facilitate an appropriate oversight by the Department on -That the financial affairs and performance of the SOCs as reported is acceptable in terms of the corporate plans and shareholders compacts; -The financial management and control structures and processes are such that accurate, timeous and reliable recording and reporting of all financial transactions takes place; 18. Submit quarterly reports to the Committee on: -SOCs cost containment program, working capital management, infrastructure investment programme, procurement management strategy and effectiveness; and programmes for supporting SMMEs inclusive of clear targets and rand values and its business efficiency programme to Parliament.	Recommendation not reported quarterly. Recommendation not reported. Financial transaction are not reported. Financial programmes and procurement management strategy not reported.

10. Recommendations.

10.1 The Committee recommends that the Minister of Public Enterprises should:

Ensure the capacitation of the internal audit function in the Department and State-Owned Companies to institute audit and risk committees in boards in line with the provisions of the Public Management Finance Act.
Provide the Committee with shareholder compacts signed with SOCs in order to enhance the oversight role of the Committee. Shareholder compacts should be submitted within one month after the signing of the agreement.
Ensure that the board comply with the Public Management Finance Act, the SOC mandate and all other applicable legislation.
Present to the Committee the strategic objectives in line with the shareholder compacts to manage the delivery of board committees through appropriate and measurable Key Performance Indicators (KPIs) for board and executive management.
Together with the Department of Planning, Monitoring and Evaluation, develop mechanisms for appropriate sanctions to discourage poor performance, ensure that the attainment of targets in the annual performance plans are aligned to budget planning and spending performance.
Institute timely consequences for executives and management who deliberately or negligently ignore their duties and contravene legislation. A list of action taken against transgressors must be provided quarterly to the Committee for follow up of all irregular, fruitless and wasteful expenditure.
Provide ethical leadership in boards and ensure appropriate sanction for breaches and transgressions in SOCs.
Present to the Committee a strategy to address the going concern matters reported by the Auditor General on Denel, South African Airways and South African Express before the end of the financial year.
Fast-track the introduction of the Shareholder Management Bill which will empower the department to carry out its oversight responsibilities over SOCs more effectively, especially in providing guidance on how to align SOCs’ strategic priorities with government policies. The Department should present the draft Bill to the Committee by the end of March 2019.
Assist with the timeous resolution of land claims in conjunction with the Department of Rural Development and Land Reform, and ensure a sustainable role for SAFCOL.
Ensure that all critical, funded and vacant posts in the Department are filled to avoid underspending before the end of March 2019.
Present to the Committee a plan to address leadership stability and filling of key positions in SOCs in the department’s quarterly report.
Present the Committee with a funding plan, cost optimisation and revenue maximisation strategy for Eskom before the end of the financial year.
Present the Committee with a transparent electricity tariff determination and its impact on consumers before the end of the financial year.
Present to the Committee a strategy on optimisation of energy mix in line with the Integrated Resource Plan 2018.
Provide clarity to the Committee on the pronouncements on increase in strategic equity partnerships from private sector and restructuring plans of SOCs.
Present to the Committee policies to mitigate potential conflicts:

Conflicts of interest policy which defines what conflicts are for that SOC and how these are managed, disclosed and reported.
Political Exposed Person (PEP) policy defines what a PEP is and how transactions with PEPs are managed, reported and disclosed.
A ‘cooling-off’ policy for outgoing directors and executives of SOCs must be developed.
A policy which details the delegation of authority limits. This should specify an appropriate Rand amount of deals/transactions that certain individuals and committees can approve.
A contentious issue policy that describes the management and escalation of contentious matters.
1. Immediately strengthen and improve the department’s oversight effectiveness over its SOCs with emphasis on the following:

Appropriate and effective planning and budgeting processes are put in place.
The financial management and control structures and processes are such that accurate, timeous and reliable recording and reporting of all financial transactions takes place.
That the appropriate financial management systems and controls are in place to ensure the effective management of the financial affairs.
That the financial affairs and performance reported is acceptable in terms of the corporate plans and shareholder compacts.
Significantly enhance reporting and accountability arrangements that facilitate an appropriate oversight by the Department; and
Urgently develop technical capacity within the Department to oversee its SOCs.
1. Provide the Committee with reasons and actions taken for non-submission and tabling of SOCs (Denel, SAFCOL, SAA and SAX) Annual Reports to Parliament.
2. Provide the Committee on the implementation of all recommendations by the Auditor General on SOCs.
3. Provide the Committee with quarterly progress reports regarding the implementation of these recommendations.
4. Provide the Committee with a report on implementation of oversight inquiry recommendations on Eskom relevant to the Department and other parties.

10.2 The Committee recommends that the Minister of Finance should:

Utilize his vested power to hold the shareholder representatives and others in the SOCs to account on financial management as articulated in the Public Finance Management Act.
Assist the department to identify business and environmental risks associated with SOCs.
Assist government through mechanisms to reduce risks associated with wholesale funding and limit exposure of SOCs. The new Financial Sector Regulation Act lays the foundation of the Twin Peaks model of financial regulation and confers on the South African Reserve Bank (SARB) an explicit statutory mandate to enhance and protect financial stability.
Introduce a transparent framework in terms of how to run SOCs commercially, and compensate them for any development mandate expenditure through budget transfers.
Enhance fiscal policy to create buffers against shocks through the development of a framework with threshold levels on the minimisation or avoidance of risky contingent liabilities.
Provide leadership on revenue enhancement in SOCs with regards to the review of pricing models, selling non-productive assets, and collecting arrears.

The Committee notes the MTEF funding request and the MTBPS funding already given to SAA and SAX. The Committee will engage further with the Department of Public Enterprises and the relevant entities regarding the request. The Committee would like to express its gratitude to the Auditor-General, management of the Department of Public Enterprises, State-Owned Companies and the parliamentary officials supporting the Committee for their hard work and co-operation during this process.

Report to be considered.

Documents

No related documents

ATC181031: Budgetary Review and Recommendation Report of the Portfolio Committee on Public Enterprises, dated 31 October 2018

Public Enterprises

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