ATC191128: Report of the Portfolio Committee on Public Enterprises on the Oversight Visit to the Department of Public Enterprises and State-Owned Companies, dated 20 November 2019

Public Enterprises

Report of the Portfolio Committee on Public Enterprises on the Oversight Visit to the Department of Public Enterprises and State-Owned Companies, dated 20 November 2019

 

1.         Introduction

 

The Portfolio Committee on Public Enterprises (the Committee) undertook an oversight visit to the Department of Public Enterprises (the Department), Transnet, Denel, Eskom, South African Express Airways and South African Airways from 27 – 30 August 2019.

 

The main purpose of the visit was to understand the department’s monitoring systems and how the department executes its oversight responsibilities over state-owned companies. Furthermore, the Committee’s intention was to assess progress that has been made in addressing governance challenges in state-owned companies, oversight mechanisms and interventions that have been introduced to enhance the department’s oversight responsibilities over state-owned companies (SOCs).

 

Furthermore, the Committee’s visit to state-owned companies such as Transnet, South African Airways, Transnet, Eskom, Denel and South African Express Airways was premised on the constitutional mandate of the committee to oversee these entities, to familiarise itself with the challenges faced by these entities and assess the performance of the entities in relation to job creation, skills development initiatives and developmental projects of these entities.

 

1.1        Delegation

 

The Committee delegation included the following members:  Mr K Magaxa (Chairperson of the Committee) (ANC), Ms J Tshabalala (ANC), Mr S Gumede (ANC), Ms D Dlamini (ANC), Ms C Phiri (ANC), Ms J Mkhwanazi (ANC), Mr S Swart (ACDP) and Mr N Kwankwa (UDM). The delegation was accompanied by the following parliamentary officials: Mr D Mocumi (Committee Secretary), Mrs Y Cele (Committee Assistant) and Mr R Mnisi (Content Advisor).

 

2.         Walkabout at SAA and Visit to Mango Airlines

 

Upon arrival at the OR Tambo International Airport the Committee made a walk about to South African Airways check in and baggage services, child care centre, ticket sales and VIP lounge. The Committee was given a tour on the headquarters of Mango airlines. Mango airlines is a subsidiary of SAA which operates its low cost flagship airline. Mango has posted profits throughout its operations in all the routes that it is currently servicing.

Mango Airlines Acting CEO and Chief Operating Officer explained to the Committee how the airline optimises its cost structure to maintain reliability and to ensure being competitive within the low cost airline space. The airline headquarters is characterised by an open space office with divisional heads working with teams. The operational centre is also responsible for bookings, and all technical services related to flights. It’s also run at the OR Tambo International Airport. The Committee was impressed with how the airline was run and managed and commended management for the work that they are doing. The Committee concluded their first day of their programme.

 

3. Visit to the Department of Public Enterprises (Arcadia, Pretoria)

 

The delegation of the department was led by the Deputy Minister, Mr P Masualle, and the Acting Director-General, Mr Kgathatso Tlhakudi. The Department made a presentation on the oversight model of the department and the tools that it used to exercise that responsibility. It also highlighted the legislative challenges that the department was facing. The Department further presented on its programme overview and provided the Committee with highlights on its SOC portfolio.

 

 

2.1        Input of Deputy Minister

The key focus of the Department has been to ensure that the department is adequately skilled in order to discharge the responsibility to oversee state-owned companies. The Department was in the process of filling all the senior management positions particularly the Director-General and Deputy Director-Generals positions. The department has also had extensive engagements with the boards and executives of SOCs to understand the challenges, that had informed the kind of the interventions initiated.   

 

2.2        Performance of State-Owned Companies

It was reported that all the State-Owned Companies reporting to the Department of Public Enterprises have been severely affected by state capture. The companies have similar challenges that includes breakdown of established structures, controls and systems; loss of experienced and critical skills in state-owned companies, corruption, malfeasance, liquidity and financial sustainability challenges. All these challenges are a direct consequence of state capture. There have been extensive periods to engage SOCs, the purpose of engaging these SOCs is to understand their business models and to prioritise on their activities. Resulting from certain processes of engagement SOCs restructuring and transformation could be experienced. Some proposals include private sector participation. The Department of Public Enterprises has implemented many interventions to stabilise the companies, by appointing ethical and capable leadership, taking action against those who have been implicated in wrong doing. The Department is working closely with law enforcement agencies and co-operating with the Zondo Commission of Inquiry into state capture in order to ensure that those implicated are brought to account.

 

2.3        Overview of Legal Framework Governing State-Owned Companies

The Department presented an overview of the legal framework that governs state owned companies and the relationship between the board and the shareholder. These pieces of legislation include amongst others:

2.3.1     The Companies Act, 2008, which provides for amongst other matters, the incorporation, registration, organisation and management of companies and defines the relationship between companies, their shareholder and the director of the board. All the companies reporting to DPE are all incorporated in terms of the Companies Act and have their own Memorandum of Incorporation. Each state owned company also has its own founding legislation excluding Denel SOC Ltd.  

 

2.4        Strengthening Governance Instruments

In the absence of a Shareholder Management Act that empowers the Department to govern these companies. The Department of Public Enterprises has governance instruments in place, and these include:

2.4.1     The logical planning and performance monitoring framework – This instrument is where the Minister communicates the strategic intent of government. The Minister and the board then concludes a shareholder compact annually, which will inform the corporate plans of the companies. The Department reviews the performance of the companies’ quarterly and annually.     

2.4.2     The significance and materiality framework – this instrument provides for the quantitative and qualitative thresholds, in line with National Treasury guidelines on transactions that require the Minister’s approval or notification. It also gives effect to the provisions of the PFMA so as to provide effective oversight on transactions that have a significant and material impact. 

2.4.3     The Memorandum of Incorporation – this instrument sets out rights, duties and responsibilities of shareholders, directors, and others within and in relation to the company. It regulates powers of company, rules, shareholder meetings, remuneration of directors, powers of directors, conflicts of interest of directors, removal of directors, board committees, and the filling of vacancies in the Board.  

2.4.4 The Board appointment process – the government is in the process of finalising a national guide for the appointment of persons into boards, which will be adopted as a uniform approach to the board appointment process.

      

3.         Oversight visit to Transnet Engineering

The Committee was welcomed by a Member of the board, Mrs M Letlape, who was representing the Chairperson of the board, Mr Popo Molefe.

The Committee was given an overview of the mandate and business of the entity, its operations, challenges and networks nationally and internationally.

 

In his introductory remarks, Ms Letlape highlighted that most of the executives of Transnet are acting because many senior executives of Transnet have been charged and other have resigned. Transnet has instituted civil claims against regiments, China Southrail, and the two former CGCEOs and CFOs. Transnet is in negotiation with the companies involved in the 1064 locomotives contract, in order to reduce the escalated prices of the locomotives.

 

The Committee undertook a visit to all the business operations in order to understand the capabilities and challenges faced by this division of Transnet.

 

3.1        Overview of the Transnet Engineering

 

Transnet Engineering (TE) is a business unit of Transnet responsible for manufacturing and maintenance. This division employs 10 400 employees across the 133 depots across the country, that are able to support various services and across all products. TE has over 150 years of experience in running maintenance, heavy maintenance, refurbishing and conversions, upgrades, new builds and leasing. The listed below includes business operations by Transnet Engineering:

 

 

 

 

 

3.1.1     Coach Business (Mainline Interior Repair Workshop)

 

The business specialises in the refurbishment of old coaches and turning them into luxury coaches. Transnet Engineering is working towards becoming an Original Equipment Manufacturer of coaches for the Sub-Saharan region.

 

3.1.2     Rolling Stock Business

 

This business is responsible for the manufacturing of modern, technologically-advanced rolling stock components. Services include the manufacturing of parts and sub-assemblies for locomotives, coaches and wagons. It refurbishes and upgrades equipment components so that they will cost-effectively extend the lifespan of the rolling stock they serve.

 

3.1.3     Wheels Business

 

The business specialises in the refurbishment and assembly of all types of railway wheels for the Southern African region. The business has the capability and facilities to assemble and build up new wheels from components brought in from local and international suppliers.

 

3.1.4     Rotating Machines Business

 

The business focuses on electrical and mechanical repair, maintenance and assembly of rotating machines in the rail industry and port business.

 

3.2        Capabilities

 

The first ever new diesel locomotive (Class 39-200) was built in South Africa by Transnet Engineering. It has six (6) modern manufacturing facilities, equipped with the latest technology, worth over R8 billion. It has customers in eighteen (18) countries across Africa and Europe and has worked with over ten (10) international original equipment manufacturers (OEMs) and component manufacturers spanning across four (4) countries. It has the capabilities build locomotives, wagons, passenger coaches, ports equipment and also does maintenance of rolling stock related components and port equipment. 

 

3.3        School of engineering

 

Transnet Engineering has a renowned school of engineering has 22 decentralised centres, that offers accredited training such as learnerships, functional training, apprenticeship, locomotive coach and wagon maintenance, advanced technical training, work integrated learning and leadership development programmes. This school has a capacity of accommodating 3000 learners per annum.  Transnet is also investing in research and development to promote innovation and develop solutions for future technologies.

           

3.4        Challenges

 

The major challenge of Transnet Engineering is the lack of support from government. There are no partnerships amongst state-owned companies to maximise efforts for industrialisation and economic growth. The capabilities of the division are under-utilised and public institutions such as South African Police Services and Passenger Rail Agency of South Africa do not use these capabilities, hence most tenders for the manufacturing of passenger rail coaches are given to foreign companies.    

 

 

4.         Visit to Transnet Freight Rail (National Operation Centre)

 

The Committee undertook a site visit of the National Operation centre, which is the nerve centre of Transnet Freight Rail.  The centre integrates and interfaces the railway system and it monitors the operations of TFR and PRASA. It monitors locomotives, wagons, network infrastructure, terminals & yards, processes, technology, systems, crew and third party operators.

 

4.1        Overview of Transnet Freight Rail

 

Transnet Freight Rail is the largest railway in Africa and the Middle East. It employs 26 694 people, transports 4.5mt per week, serves 450 key accounts. It has a wagon fleet of 69 700 and locomotive fleet of 2600. Transnet Freight Rail transports 30% of the nation’s freight ton kilometres annually. Some of the commodities transported include agriculture and bulk liquids; steel and cement; iron ore and manganese; mineral mining and chrome; coal, container and automotive business.  

 

4.2        Capabilities

 

Transnet Freight Rail maintains and operates a vast network providing connectivity to export engines, national corridors and rural access. It has the second longest heavy haul iron ore line in the world which is 861km. Transnet Freight Rail recently launched a 4km long train, with 375 wagons, officially making it the longest train in the world. The train transported about 24 000 tonnes of manganese over a distance of more than 860km between the Sishen mine, in the Northern Cape, and Saldanha Bay.

 

5.         Visit to Denel

 

The Committee was welcomed by the chairperson of the board, Ms Monhla Hlahla and the Group Chief Executive Officer, Mr Danie Du Toit. The leadership of Denel made a brief presentation which gave an overview of the company and all its subsidiaries. The Committee then undertook site visits to Denel Land Systems and Denel Pretoria Metal Pressings.

 

5.1        Overview of the Denel Land Systems

 

Denel Land System is a consolidated, project-based design and development house for combat turrets, artillery development, maintenance and upgrades and small arms. It also serves as a system integrator for the South African Army. It is the strategic supplier of weapons (large and small calibre) and weapon systems to the South African security forces.

 

5.1.1     Capabilities

 

Denel Land Systems have the capability to manufacture all barrels required for own weapons and weapon systems. This includes barrels for pistols, machine guns, rapid fire canons as well as larger barrels for armour and artillery systems. Denel Land Systems do inside chroming of barrels as well as autofrettage of larger barrels and have the capability to manufacture most of the components for all its own infantry products. Denel Land Systems also have metal treatment and surface treatment capability from small to larger components.

 

5.1.2     Challenges

 

The challenges facing Denel Land Systems are linked to the reputational damage that the company has suffered though state capture and the liquidity challenges. Due to the declining budget of the South African National Defence Force, the orders have declined and the company have to rely mainly on international customers.

 

5.2        Visit to Denel Pretoria Metal Pressings

 

Denel Pretoria Metal Pressings (PMP) manufactures small and medium calibre ammunition (5.56mm to 35mm). It is the supplier of components to ammunition factories (brass strip, brass cups, primers, fuses, cartridge cases, etc). Denel PMP has been involved in the manufacture of ammunition since 1938. It is a division of Denel SOC Ltd, a well-known player on the world defence market.

 

5.2.1     Challenges

 

The plant has serious challenges relating to the dilapidated and old facilities due to lack of investments in new equipment. Some of the factory sites are not in operation causing the business losses and inability to deliver timeously on orders. The business is also affected by a decline in orders from the South African National Defence Force (SANDF) and the South African Police Service (SAPS).  The entity is unable to attract young people and its average employees are closer to retirement.

 

6.         Visit to South African Airways

 

The Committee met with the board of South African Airways and the Senior executives of the airline. The board presented an overview of the progress made in the implementation of the long term turnaround strategy and the challenges facing the airline. The Committee undertook site visit to South African Airways Technical, where it was introduced to the SAAT maintenance, overhaul and repair programme.

 

6.1        Overview of the Company

 

South African Airways is a state-owned company that has five subsidiaries, namely, Airchefs, SAA Cargo, SAA Technical, Mango and SAA Voyager. The group employs in total 9 745 employees. SAA only carries 13% of traffic in and out of South Africa, and 56% of the SAA revenue is from intercontinental flights. 

 

6.2        Update on the Implementation of the Long Term Turnaround Strategy

 

The board of South African Airways approved the Long Term Turnaround Strategy to the Minister with a breakeven position in 2020/21 financial year. The company received R5bn in 2018/19 and will receive R5.5bn in 2019/20 financial year. The revised 2018 Corporate Plan was built around five key pillars: Liquidity and balance sheet restructuring; revenue stimulation and network optimisation; organisational design; supply chain transformation; and South African Airways Technical business process transformation.

 

Progress that has been made in implementing pillars of the LTTS and addressing governance challenges. The board has also commissioned various forensic investigations on SAA and SAA Technical. Recommendations of the forensic reports are being implemented, and some reports have been handed over to the Hawks for criminal investigation as well as the National Prosecuting Authority for evaluation of evidence. Disciplinary action has also been taken against employees implicated in wrongdoing and corruption.   

 

6.3        Financial Challenges

 

The company has a debt of R12.7billion, which comprises of R9.2bn legacy debt and R3.5bn working capital facility. A portion of the capital injection will be used to repay the R3.5bn working capital facility and R2bn will be used to meet the airlines working capital requirements. The success of the long-term turnaround strategy is dependent on a capital injection of R21.7bn. The company required R2bn to fund working capital in 2019/20 by December 2019. It was also in negotiations with lenders to avail the R2bn working capital funding. 

 

7.         Meeting with South Africa Express Airways    

 

The Committee met with the leadership of South African Express Airways, led by the Acting Chief Executive Officer, Ms Siza Mzimela. The meeting was prompted by the decision by Airports Company South Africa to ground the airline due to non-payment of landing and parking fees owed to ACSA. On 24 May 2018, SAX was grounded by Civil Aviation Authority because Airlink had raised an objection with the Department of Transport regarding the reintroduction of SAX flights in regional routes.  The Committee was briefed that the leadership of the airline was having meetings with the Deputy Minister of Public Enterprises to find solutions, and later that day the boards of ACSA and the airline would meet to resolve the matter. The resolution of the problem was also dependent on the transfer from National Treasury to enable the airline to pay ACSA.

 

7.1        Overview of the Company

 

South African Express Airways has been severely affected by state capture, corruption and maladministration. The company employs 813 employees and has a fleet of 22 aircrafts. The airline provides transportation of passengers, cargo and mail, air charters and other related services. The airline operates predominantly on routes that are secondary within South Africa and the region, such as Bloemfontein, Kimberley, Gaborone and Botswana.

 

7.2        Update on the Implementation of the Turnaround Strategy

 

South African Express Airways has adopted a G-POCH strategy based on the principles of Governance, Operational Efficiency, Customer Value and Human Capital. This strategy aims to achieve the following: ensure good corporate governance, review policies and procedures, grow revenue, introduce cost reduction program, improve and maintain on time performance, focus on improving ground turnaround, improve customer satisfaction, improve on time departure, develop communication plan, retain and develop competent employees and inculcate a culture of high performance.

 

Since the appointment of the board in May 2018, many policy and regulatory requirements have been reviewed to ensure the airline is compliant with aviation laws. Revenues have improved due to the renegotiated and cancelled contracts. All charters have been cancelled and employee costs have been reduced by 10% (overtime curbed). On time performance has improved and a Cape Town base has been opened. The company was in the process of a right sizing exercise which would affect 124 positions.

 

The airline has taken action against all employees and former employees who were implicated in corruption and maladministration. Criminal cases have been opened against individuals who participated in corrupt activities. All the information has been submitted to all enforcement agencies and the Zondo Commission of inquiry.

 

7.3        Challenges

 

The challenges facing the airline include weak balance sheet, long outstanding debts, frozen credit lines, liquidity challenge, monthly cash burn, high cost structure, low staff morale, high staff turnover, high rate of management vacancies, onerous contracts/agreements, zero accountability and shortage of skills. The airline has eleven aircraft on the Aircraft Operators Certificate (AOC). The airline has a ratio of 56 employees per aircraft and the ideal is 25 employees per aircraft for competitiveness. Only seven aircrafts are operating as the rest are broken.  

 

8.         Visit to Eskom Lethabo Power Station

 

The Committee met with the leadership of Eskom led by the Group Executive for Generation, Mr Bheki Nxumalo and the power station General Manager, Mr Thomas Conradie. The Committee received an overview presentation on the Lethabo power station and the coal fired power generation process. The Committee then undertook a site visit on the power station to understand the operation and the coal fired power generation process.     

 

8.1        Overview of the Power Plant

 

Lethabo power station is one of 30 power stations operated by Eskom. The power station is situated in the Northern Free State, approximately 10km south of Vereeniging and 25km east of Sasolburg. The station comprises of sic production units each producing 618MW electricity. The plant has 679 employees and was fully commissioned December 1990. The power station has a 75% energy availability on average. The power station has an outreach programme with the surrounding communities and accommodates school visits to expose children to the different careers available in the coal power station.

 

 

9.         Visit to Eskom National System Operator

 

The Committee visited the national system operator in order to understand its operations. The Committee was taken on a site visit and a brief overview presentation was made on the corporate structure, the role of the system operator, generation dispatch responsibility, transmission network responsibility and how to prevent a national blackout.

 

9.1        Overview of the System Operator

 

The system operator is the electricity transport and distribution supervisor. It ensures continuous delivery of quality electricity by maintaining a stable network. The system operator facilitates power trading in the SADC region through the South African Power Pool.

 

9.2        Functions of the System Operator

 

The responsibilities of the system operator include:

• scheduling and dispatching generation to meet supply and demand;
• Ensure reliability, safety and security of the interconnected power system (IPS) in the delivery of power from generators to distributors;
• Metering data collection

Development of the South African grid code and monitoring compliance thereto;

• Providing operational information to key stakeholders. 

 

9.3        Challenges

 

The challenges facing the system operator are caused by weather conditions such as snow, flooding, lightning, wind and equipment failures due to failures and copper theft. The system operator is design to control and manage demand and supply, in order to minimise the impact of outages and prevent a blackout. Eskom does have contingency plans to prevent black-outs. 

 

10.        Observations

 

The Committee made the following observations regarding the state of state-owned companies:

10.1      Acknowledged the extend of the damage that has been caused by state capture in all the state-owned companies.

10.2      Challenges facing state-owned companies relate to breakdown of established structures, controls and systems; loss of experienced and critical skills in state-owned companies, corruption, malfeasance, liquidity and financial sustainability challenges.

10.3      There has been a lack of investments in research and development and advance equipment to improve the comparative advantage of state-owned companies.

10.4      Most state-owned companies do not have partnerships and continue work in silos. The lack of co-operation between state-owned companies have denied the country the ability to advance both in terms of growing the economy and creating jobs. Noted with concern that South African Express Airways was not maintaining its aircrafts at South African Airways Technical, but opted for a private firm.  

10.5      Acknowledged the commitment of the boards of state-owned companies to promote clean governance and ethical leadership.         

10.6      Noted with concern the resignations of the Group Chief Executive Officers of both Eskom and South African Airways, noted that there was something wrong with regard to the support that was given to these executives.

10.7      The lack of remuneration standards for boards and executives of state-owned companies contributes to the high labour costs.

 

 

11.        Recommendations

 

The Committee recommends that the Minister of Public Enterprises should:

11.1      consider to engage with the Minister of Police and Minister of Transport to encourage these departments to use the capabilities of Transnet Rail Engineering to produce passenger rail coaches for Passenger Rail Agency of South Africa and security technology solutions for the police. 

11.2      ensure there is a necessary support and a conducive environment for Group Chief Executive Officers to enable them to successfully implement the long term turnaround strategies.  

11.3      consider to engage the Minister of Defence and Military Veterans regarding the orders of the South African National Defence Force from Denel.

11.4      consider to engage the Minister of Transport regarding the impact of high airport taxes on the airlines to stimulate business and create a conducive environment for struggling airlines.    

11.5      consider expanding the mandate of Denel to respond to the socio-economic challenges facing the country by developing solutions that can enhance capabilities of the country to address violence against women and children, human trafficking, xenophobic attacks, criminal surveillance and enhance the performance of state agencies such as the Police and law investigating authorities.

 

Report to be considered.