ATC200604: Report of the Portfolio Committee on Public Enterprises on Budget Vote 10: Public Enterprises, and the Annual Performance Plan for 2020/21 of the Department of Public Enterprises, dated 2 June 2020
Report of the Portfolio Committee on Public Enterprises on Budget Vote 10: Public Enterprises, and the Annual Performance Plan for 2020/21 of the Department of Public Enterprises, dated 2 June 2020
The Portfolio Committee on Public Enterprises, having received a briefing from the Department of Public Enterprises on the Strategic Plan, Annual Performance Plan and on the budget vote on 20 May 2020, reports as follows:
Guided by the Rules of Parliament, promulgated in terms of the Constitution, the Portfolio Committee on Public Enterprises plays an oversight role on the Ministry, Department of Public Enterprises and State-Owned Companies.
The Committee has to scrutinise the Strategic Plan and Annual Performance Plan of the Department and its entities in order to see if the funds requested are aligned to the objectives as stated in the respective Strategic Plan and Annual Performance Plan documents.
The State has a developmental role to play and uses state-owned companies as the primary tools for fulfilling this role. The developmental role should support a number of economic and development goals, including delivery of strategic infrastructure that will unlock growth potential in the country; support of the wider economy and marginal business sectors and support of economic recovery where needed. The State requires strategic, organizational and operational capacity to play its developmental role. State-owned companies (SOCs) fulfil the state’s operational role in this requirement, acting as the implementing agents for national development strategy.
2. Annual Performance Plan of the Department of Public Enterprises
The Department of Public Enterprises presented an Annual Performance Plan for 2020/21 financial year to the Committee. The Department described the overarching policy and strategic direction and priorities of Government, as articulated by the 2020 State of the Nation Address by the President, the National Development Plan, and the Presidential Review Committee on State Owned Enterprises. The Department’s allocation is a product of a budget process of the National Treasury, which starts in July of a prior year and culminates in the Medium Term Budget Policy Statement (MTBPS) in November of the prior year, and the confirmation of allocations in the February Minister of Finance’Budget Statement (Estimates of National Expenditure), with a three-years view, that are then outlined in the Department’s Annual Performance Plans.
The Department in the Annual Performance Plan includes the priorities set in the Medium-Term Strategic Framework, which are to be implemented by either the Department directly or indirectly through its SOCs.
The Department has had to prioritise within the current budget, expenditure to mitigate the impact of COVID19 on its operations.
2.1 Mandate of the Department of Public Enterprises
The Department of Public Enterprises is the shareholder representative for government at the State-Owned Companies in its portfolio. The Department’s mandate is to fulfil oversight responsibilities at these State-Owned Companies to ensure that they contribute to the realisation of government’s strategic objectives, as articulated in the National Development Plan (NDP), the Medium-Term Strategic Framework (MTSF), the New Growth Path (NGP) and the Industrial Policy Action Plan (IPAP).
State Owned Companies are crucial to driving the State’s strategic objectives of creating jobs, and enhancing equity and transformation. The Department does not directly execute programmes but seeks to use State ownership in the economy to support the achievement of these objectives. The post COVID 19 strategies, plans and priorities will be included after the tabling of the new budget which is going to be presented by the Minister of Finance. These priorities are expected to be included in the Annual Performance Plan of 2021/22.
2.2 Strategic Objectives of the Department
The Department adopted a new Strategic Plan in line with the National Development Plan (NDP) and Medium-Term Strategic Framework (MTSF) in response to internal and external environment.
The strategy seeks to respond to prevailing macro-economic challenges and to best utilise scarce resources through creating of maximum efficiencies and effectiveness in its execution.The department has a significant role to play in the South African economy and is, albeit indirectly, a key enabler of economic stability and growth.
It is the department’s intention to progressively reposition the department from a largely compliance-driven focus to being a major contributor to the reindustrialisation of the economy through the capacity that exists within its portfolio of SOCs. This repositioning also re-emphasises the leading role that the DPE must take to set standards that guide the oversight function across Government.
Several of the SOCs under the department’s oversight have problems, due to not only operational challenges and the legacy of state capture, but also the increasingly difficult and complex challenges of sustainably balancing financial and commercial viability and the needs of the markets they serve, with meeting the socio-economic commitments of the NDP.
The most important and actionable considerations under the department’s control are likely to befound in three key Strategic Impact Areas:
A renewed emphasis on the re-industrialisation of South Africa through the creation of an enabling environment underpinned by the localisation of industry value chains, SMME development and the development of appropriate technical skills in occupations in demand to enhance efficiencies within SOC operations. This will require the active engagement of and collaboration with industry.
The adoption of a unified oversight function by all stakeholders in terms of an effective methodology and process, underpinned by coherent and consistent strategic directives to SOCs. This will require internal restructuring and capacitation as well as process, system and modelling enhancements.
A strong emphasis on SOCs’ financial, commercial, operational and environmental performance, underpinned by clear and relevant standards and globally-competitive pricing that delivers a competitive advantage to the South African industries.
The Department is the Shareholder representative for Government and currently instructed by the Executive to oversee core strategic State-Owned Companies. The department is the primaryinterface between Government and the SOCs concerned and provides input to theformulation of policy, legislation and regulation.
In executing this function, the department has identified three programmes in its Annual Performance Plan (APP) which are the following; Administration and Corporate Management, Governance, Legal Assurance, Risk Profiling and Mitigation, and Business Enhancement and Industrialisation.
The Administration and Corporate Management programme has prioritised two outcomes, namely,to promote alignment and efficiency across institutional model and improved ICT and business alignment and enhance function with indicators set as a number of interventions and development of the department’s enterprise architecture.
The development of the shareholder management bill as an outcome has been deprioritised by the department in this year’s APP. The department still is required to provide progress on the shareholder management as a target that was set in 2019/20 APP.
The Governance, Legal Assurance, Risk Profiling and Mitigation programme has been renamed in the new strategy incorporation risk mitigation from SOC Governance Assurance and Performance in 2019/20 APP.
The programme has identified the following outcomes; strengthen the governance system of SOCs and promote institutional alignment in the execution of oversight function, strengthen shareholder oversight through the Memorandum of Incorporation (MOI) and improved independent financial sustainability of SOCs. The indicators include annual assessment of independent board performance evaluation framework, SOCs standardised rules governing the conduct of SOC and a number of SOC quarterly reviews and reports produced.
The Business Enhancement and Industrialisation programme is intended to provide sector oversight of SOCs by advancing industrialisation,transformation, intergovernmental relations and international collaboration services;and support the Shareholder to strategically position and enhance the operations ofSOCs.
The outcomes of the programme are the following; increase the contribution of SOCs to support the transformation of the South African economy, support the development of small, medium, and micro enterprises (SMMEs), accelerating the development of skills to support the needs of the economy, reduce vulnerability to risks associated with climate change and transition to low carbon economy by reducing emissions.
The indicators for this programme includes; increase percentage spend on local content, increase percentage spend of SOCs’ preferential procurement, percentage increase in SOCs’ CSI programme allocation, annual value of enterprise development contributions, number of leaners enrolled in SOCs’ skill development programmes, SOCs’ implementation in line with the DPE Africa Strategy, adaptation to climate change impact and SOCs’ implementation of Paris Climate Change Agreement.
2.3 Policy Priorities for 2020/21
The Department of Public Enterprises oversees seven state-owned companies, namely Alexkor, Denel, the South African Forestry Company (SAFCOL), Eskom, South African Airways (SAA), South African Express Airways (SAX) and Transnet. The President made the following pronouncements in his State of the Nation address on the 13th of February 2020:
- Several state-owned enterprises (SOEs) are in distress, and our public finances are under severe pressure.
- It is you, the people of South Africa, who carry this burden, confronted by rising living costs, unemployment, unable to escape poverty, unable to realise your potential.
- We are taking the following measures to rapidly and significantly increase generation capacity outside of Eskom:
- A Section 34 Ministerial Determination will be issued shortly, by the Minister of Mineral Resources and Energy, to give effect to the Integrated Resource Plan 2019, enabling the development of additional grid capacity from renewable energy, natural gas, hydro power, battery storage and coal.
- We will initiate the procurement of emergency power from projects that can deliver electricity into the grid within three to 12 months from approval.
- The National Energy Regulator will continue to register small scale distributed generation for own use of under one megawatt (MW), for which no license is required.
- The National Energy Regulator will ensure that all applications by commercial and industrial users to produce electricity for own use above 1MW are processed within the prescribed 120 days. It should be noted that there is now no limit to installed capacity above 1MW.
- We will open bid window 5 of the renewable energy Independent Power Producers (IPPs) and work with producers to accelerate the completion of window 4 projects.
- We will negotiate supplementary power purchase agreements to acquire additional capacity from existing wind and solar plants.
- We will also put in place measures to enable municipalities in good financial standing to procure their own power from IPPs.
- In line with the roadmap announced last year, Eskom has started with the process of divisionalising its three operating activities – generation, transmission and distribution – each of which will have its own board and management structures.
- This year, we are moving from the stabilisation of SOEs to repurposing these strategic companies to support growth and development.
- After years of state capture, corruption and mismanagement, we are working to ensure that all SOEs are able to fulfil their developmental mandate and become financially sustainable.
- In consultation with the Presidential SOE Council, we will undertake a process of rationalisation of our SOEs and ensure that they serve strategic economic or developmental purposes.
- The extent of the state capture, corruption and mismanagement in SOEs is best demonstrated at South Africans Airways, which was placed in business rescue late last year.
- The business rescue practitioners are expected to unveil their plans for restructuring the airline in the next few weeks.
- In the interests of South Africa’s aviation industry and our economy, it is essential that a future restructured airline is commercially and operationally sustainable and is not dependent on further government funding.
- The Infrastructure Fund implementation team has finalised the list of shovel-ready projects and has begun work to expand private investment into public infrastructure sectors with revenue streams.
- These include areas like student accommodation, social housing, independent water production, rail freight branch lines, embedded electricity generation, municipal bulk infrastructure, and broadband roll-out.
- The Procurement Bill will soon be presented to Parliament as part of our efforts to empower black and emerging businesses and advance radical economic transformation.
The Minister of Finance contextualized the global economic environment by stating the following:
In 2020, global economic growth is expected to strengthen to 3.3 per cent. Global inflation remains contained. Global monetary policy is supportive, and we are benefiting from demand for emerging market assets. Asia (excluding Japan) is expected to grow by 5.8 percent in 2020. The Coronavirus is a source of uncertainty to this forecast. With growth of 3.5 percent, Sub-Saharan Africais forecast to be the second-fastest growing region in the world. Against this backdrop we forecast that the South African economy will grow by 0.9 per cent and inflation will average 4.5 per cent in 2020. Over the next eighteen months, the economy should get a number of jump starts.
These include, amongst others:
- The fruits of the reform agenda led by the President
- Lower inflation
- The interest rate reduction earlier this year
- The recent gains in platinum group metals prices
- The impending change to the electricity regulatory framework
- The tax proposals we are setting out today
Persistent electricity problems will, however, hold back growth. Over the next three years, we expect growth to average just over 1 per cent. Therefore, a stable supply of electricity will be our number one task.
Last year, the Government embraced the ideas contained in the document Towards an Economic Strategy for South Africa. This is our plan, and it contains the basic and fundamental pillars of our approach:
- Strengthening the macroeconomic framework to deliver certainty, transparency and lower borrowing costs
- Focusing spending on education, health and social development
- Modernising “network industries” and restructuring our state-owned enterprises.
- Opening markets to trade with the rest of the continent
- Implementing a re-imagined industrial strategy
- Lowering the cost of doing business
- Focusing on job-creating sectors, such as agriculture and tourism
Underpinning all of this is the need for an efficient and capable state. We must also leverage the private sector as far as possible.
The Minister further dealt with issues of fruitless and wasteful expenditure as follows. We are already acting on fruitless and wasteful expenditure. Last year, this House amended the Public Audit Act to empower the Auditor General to:
- Refer matters to a public body for investigation and prosecution
- Take binding remedial actions
- Recover money directly from the responsible culprits
- To show the determination of the executive to deal with runaway costs, we will implement a number of steps.
- Abolishing the current wasteful subsistence and travel system
- Replacing the cell phone policy
- Requiring economy class travel for all domestic flights, except for exceptional circumstances.
The Minister of Finance further restated government commitment on SOCs. Government will do “whatever it takes” to ensure a stable electricity supply. As I said, it is our number one task. We have allocated R230 billion over ten years to achieve the restructuring of the electricity sector. The current electricity shortfall will ease as Eskom finishes critical maintenance. Bid Window 4 of the renewable energy programme is being accelerated. The rapid decline in renewable energy prices will give new momentum to Bid Window 5.
Determinations to implement the Integrated Resource Plan of 2019 are finalised and await the concurrence of the National Energy Regulator.It will shortly be possible for municipalities in financially good standing to purchase electricity from independent power producers.
3. Programmes of the Department
3.1 Programme 1: Administration
The purpose of this programme is to provide strategic leadership, management, and support services to the Department.
The Department’s core functions require significant administrative support, and a substantial portion of the budget is in the Administration programme, which has cross-cutting sub-programmes providing for intergovernmental and international relations, strategic planning, monitoring and evaluation, and communications.
Over the medium term, the majority of the allocation is within compensation of employees, which will provide technical and administrative support to the Department. The overall budget for the programme increases by 4.1 per cent from R163.1 million in 2019/20 to R184.1 million in 2022/23. Expenditure on compensation of employees constitutes 58.3 per cent over the medium term. Over the medium term, expenditure on compensation of employees grows by 9.3 per cent from R85.4 million in 2019/20 to R111.6 million in 2022/23. The number of personnel is expected to increase from 114 employees to 139 employees over the medium term.
Spending on consultants is expected to decrease by 12.5 per cent over the medium term and remains 2.7 per cent of the budget over the medium term. Goods and services constitute
38.9 per cent of the budget over the medium term. Travel and subsistence constitute 6.8 per cent of the budget, and increases by 6.2 per cent over the medium term, which is required by the programme to carry out its oversight function of the state-owned companies, situated throughout South Africa.
3.2 Programme 2: SOCsGovernance Assurance and Performance
The purpose of this programme is to provide state-owned companies’ governance, legal assurance, financial and non-financial performance monitoring, evaluation and reporting systems, in support of the shareholder to ensure alignment with government priorities.
The objectives of the programme are to ensure effective shareholder oversight of state-owned companies on an ongoing basis by:
- Providing governance and legal systems
- Developing and maintaining shareholder risk profiles and mitigating strategies for government’s state-owned companies
- Monitoring, evaluating and reporting on financial and non-financial performance of state-owned companies, and proposing intervention measures when required.
The programme has four sub-programmes namely:
- Management comprises the office of the deputy director general, which provides strategic leadership and management for the programme’s personnel.
- Legal provides external legal services and support, including transaction and contract management support, to sector teams and the commercial activities of the state-owned companies within their portfolio.
- Governance develops, monitors and advises on legislative, corporate governance and shareholder management systems for the department and its portfolio of state-owned companies. The sub-programme develops and implements risk and compliance management guidelines and systems for shareholder risk.
- Financial Assessment and Investment Support analyses state-owned companies’ capital planning, operational performance, execution of capital programmes and proposed restructuring proposals, and advises on appropriate action.
The sub-programme Management constitutes the smallest unit of the programme at 6.3 per cent of the budget over the medium term. The largest unit is Financial Assessment and Investment Support at 33.2 per cent of the budget followed by the sub-programme Legal at 32.2 per cent and Governance at 28.4 per cent of the budget. The overall budget for the programme increases by 13.7 per cent from R41.6 million in 2019/20 to R61.1 million in 2022/23.
Over the medium term, 68.1 per cent of the programme 2 budget is allocated for spending on compensation of employees over the medium term, with the number of personnel expected to increase from 34 employees in 2019/20 to 36 employees over the medium term. Compensation of employees increases by 8.8 per cent over the medium term, from
R31.7 million in 2019/20 to R40.7 million in 2022/23. Expenditure on consultants is expected to increase by 50.8 per cent over the medium term from R3.5 million in 2019/20 to R12.1 million in 2022/23. Legal services increase by 4.5 per cent over the medium term, while travel and subsistence increased by 30.7 per cent from R2.0 million in 2019/20 to R4.5 million over the medium term.
3.3 Programme 3: Business Enhancement, Transformation and Industrialisation
The purpose of the programme is to provide sector oversight to ensure that state-owned companies contribute to the advancement of industrialisation, transformation, intergovernmental relations and international collaboration services. The programme will also support the shareholder in strategically positioning and enhancing the operations of state-owned companies.
Over the medium term, the programme’s budget decreases by 69.9 per cent from
R56.7 billion in 2019/20 to R1.9 million in 2022/23. The decrease is due to the Department reducing transfers to the state-owned companies over the medium term. Through this programme, the department will contribute to the enhancement of the performance of SOCs on an ongoing basis by:
• Conducting reviews, research and modelling of pipeline and new business enhancement opportunities within SOCs
• Assessing operations of SOCs and developing mitigation instruments in conjunction with policy departments, regulatory bodies and industry
• Conducting research, modelling job creation and transforming instruments for SOCs to inform compact alignment imperatives, promote SOCs’ contribution to inclusive economic growth, unlock bottlenecks affecting SOCs and inform evidence-based policy formulation.
The sub-programme Energy Resources exercises shareholder oversight over Eskom, Alexkor and the South African Forestry Company (SAFCOL). The budget for Energy Resources is expected to decrease by 93.5 per cent over the medium term, from R49.0 billion in 2019/20 to R13.4 million in 2022/23. Over the next three financial years until 2021/22, the programme constitutes 81.6 per cent of the total programme expenditure.
The sub-programme Research and Economic Modelling conducts cost benefit analysis reviews on business enhancement and transformation initiatives, and develops economic sustainability models for proposed work packages and projects. The budget increases from R12.5 million in 2019/20 to R12.9 million in 2022/23, an increase of 0.9 per cent in nominal terms. Over the medium term, the sub-programme constitutes 0.1 per cent of the programme’s budget.
The sub-programme Transport and Defence exercises shareholder oversight over Transnet, South African Airways, South African Express Airways and Denel. The budget for the sub-programme constitutes 18.3 per cent of the programme budget over the medium term. The sub-programme budget decreased in nominal terms by 38.0 per cent from R7.6 billion in 2019/20 to R1.8 billion in 2022/23.
The sub-programme Business Enhancement Services develops and coordinates the implementation of SOCs’ strategies to leverage localisation programmes; provide intergovernmental coordination and support to programmes and SOCs in relation to economic development programmes, as agreed with provincial and local governments; and maintains a register of commitments made by SOCs and lobbies for the implementation of special programmes focusing on skills development, transformation and the youth. The sub-programme’s budget constitutes 0.1 per cent of the programme’s budget over the medium term. The sub-programme’s budget decreases in nominal terms by 2.0 per cent from R27.7 million in 2019/20 to R30.2 million in 2022/23.
Compensation of employees constitutes 0.2 per cent of the programme’s budget over the medium term, with goods and services accounting for 0.1 per cent. Compensation of employees increases by 7.9 per cent from R53.1 million in 2019/20 to R66.8 million in 2022/23. Personnel in the programme is projected to increase from 54 employees in 2019/20 to 56 employees over the medium term. Goods and services are projected to increase by 6.0 per cent from R25.1 million in 2019/20 to R29.9 million in 2022/23. Consultants increase by 9.2 per cent over the medium term from R16.6 million in 2019/20 to R21.6 million in 2022/23. Consultants accounts for 0.1 per cent of the goods and services budget over the medium term.
Payments for financial assets constitutes 99.6 per cent of the programme’s budget. Payments for financial assets decreases by 67.9 per cent from R56.6 billion in 2019/20 to R1.9 billion in 2022/23. Eskom will receive an additional R33 billion in 2020/21 through the Special Appropriations Act (2019) in addition to the provisional allocation for R23 billion. Over the medium term period, South African Airways has been allocated an amount of R9.9 billion (R3.8 billion in 2020/21, R4.3 billion in 2021/22 and R1.8 billion in 2022/23) for the repayment of government guaranteed debt and the provision of working capital. South African Express Airways has been allocated R164 million in 2020/21 to eliminate government’s contingent liability exposure, relating to aircraft lease payments and letters of credit. Denel will receive R526 million in 2020/21.
Over the medium term the Department will focus on strengthening its oversight capacity and ensuring that SOCs under its authority are contributing to investment in key infrastructure. Table 1 below gives the department’s medium term allocation with the real and nominal increase over the current financial year.
Table 1. Estimate of Expenditure over the medium term
Nominal Rand change
Real Rand change
Nominal % change
Real % change
Programme 1: Administration
0,74 per cent
Programme 2: State-Owned Companies Governance Assurance and Performance
31,25 per cent
Programme 3: Business Enhancement, Transformation and Industrialisation
-33,61 per cent
-36,89 per cent
-33,46 per cent
-36,75 per cent
Source: National Treasury (2020)
Table 1 describes the changes in allocations from the years 2019/20 and 2020/21, and the outer years of the MTEF. From this, the following can be concluded:
- Programme 1: Administration, has a nominal increase of 0.74 per cent in 2020/21, with real decrease of 4.24 per cent. Programme 1 accounts for the second largest allocation of the Department’s overall budget in 2020/21.
- Programme 2: State-Owned Companies Governance Assurance and Performance receive the smallest allocation in 2020/21. The programme increases by 31.25 per cent nominally in 2020/21 or in real terms by 24.76 per cent.
- Programme 3: Business Enhancement, Transformation and Industrialisation accounts for the largest allocation of the budget. Programme 3 allocations has decreased by 33.61 per cent due to the inflated 2019/20 budget of the R39 billion allocation during the adjusted budget process in October 2020 to this programme.
Overall, the Department’s budget decreases by 33.46 per cent in nominal terms from
R56.883 billion in 2019/20 to R37.849 billion in 2020/21.
Compensation of employees amounts to R197.1 million for 2020/21, an increase of 15.8 per cent on R170.2 million in 2019/20. Goods and services amount to R108.7 million, an increase of 4.5 per cent on R104.0 million in 2019/20. Of the goods and services budget, the use of consultants constitutes 35.6 per cent while travel and subsistence accounts for 20.7 per cent of the budget for 2020/21. Compensation of employees is set to increase at an average annual rate of 8.8 per cent, from R143.8 million in 2019/20 to R219.1 million in 2022/23, which constitutes the Department’s largest Administrative cost driver. Travel and subsistence increase from R18.8 million in 2019/20 to R24.6 million in 2022/23; while consultants increase from R32.7 million in 2019/20 to R42.2 million in 2022/23.
4. Report of Auditor-General on the Annual Performance Planof the Department of Public Enterprises for 2020/21financial year
By the time of the consideration of the annual performance plan and budget of the Department of Public Enterprises, the Auditor-General had not yet completed the auditing of the annual performance plans of the department and its state-owned companies.
5. State-Owned Companies Performance
State-owned companies are experiencing governance, financial and operational challenges that have affected their performance and weakened their governance structures.
Alexkor was placed under administration on 12th September 2019 for a period of six months. Alexkor is not operating as a going concern, but could see its cash reserves depleted by the end of June as it is unable to generate income independent of the Pooling and Sharing Joint Venture (PSJV), mining operations located in the Northern Cape, over which it does not have management control due to the PSJV unincorporated structure.
Alexkor is a state-owned company whose core business is diamond mining around Alexander Bay on SA's West Coast. Its non-core business includes residential and community services, among others. The state-owned entity's financial woes have been compounded by the poor financial performance of a (PSJV) between the Richtersveld Mining Company (RMC) and Alexkor, which was established in 2011.
The PSJV is "technically insolvent" as it has not been generating sufficient cash flow due to the poor performance of its diamond outputs. This was due to worsening weather conditions impacting marine mining operations, declining quality of land diamonds and no production from deep sea operations, said the department of public enterprises. Alexkor already had to impair a R200 million loan to the PSJV in 2018/19.
When the administrator appointed for a six-month term in September 2019, the PSJV had R126 million in outstanding debt – mainly comprised of staff pension fund contributions, medical aid contributions and tax payments such as VAT and PAYE. The repayment plan had been developed and by the time the administratorleft his duties, the PSJV's debt was at R50 million. It could possibly be less than R30 million at this point.
Denel management has in the past citing liquidity challenges faced by the company because of orders totalling R101 million which could not be delivered due to lockdown. The company had challenges paying salaries to employees leading to anxiety and staff moral in the entity. In response to the COVID-19, Denel says two projects to design and manufacture urgently needed local ventilators for the treatment of Covid-19 patients have reached critical stages. The projects by two separate divisions within the state-owned defence company both fall under Project Sabela, which is being coordinated by Denel in partnership with other state-owned entities, research bodies and companies in the private sector.
There are implications of COVID-19 also known as the novel coronavirus for some SOCs. Eskom was unable to raise revenue. While it has been able to avoid load shedding and implemented maintenance of some plants, the financial position had worsened due to a loss of revenue as a result of businesses closing down and municipalities facing similar difficulties. Eskom is committed to the end-of-2021 deadline for completing the unbundling of the vertically integrated power utility.
The company is fully committed to adhering to the timeline contained in government’s restructuring roadmap. The decision to first pursue divisionalisation of the utility was defended on the basis that it would highlight the operational and structural inefficiencies without creating the risk of a debt default, which “precipitous unbundling” could trigger.
Separate divisional boards had been set up for generation, transmission and distribution and MDs had been appointed to lead each division. The generation division is headed by BhekiNxumalo, transmission by SegomocoScheppers and distribution by Monde Bala. Each division was already managing separate income statements and, in time, separate balance sheets would be created so that each division could take it share of the utility’s debt, which currently stood at above R450-billion.
Eskom could achieve independent financial sustainability should its debt be reduced to R200-billion and should it have a cash balance of R30-billion and a margin of 35%. Eskom’s unsustainable debt remained its biggest challenge. The utility did not anticipate any additional bail-outs beyond those already announced by the National Treasury, but was considering the sale of noncore assets and businesses, including the Eskom Finance Company, for which bids were already being entertained and Escap, which is the group’s captive insurance unit.
A turnaround plan at Eskom Rotek Industries could also involve some disposals, but the unit itself remained core to Eskom. Any proceeds from noncore disposals would be used to reduce debt. Eskom would also slash capital expenditure by R22-billion against an initial budget for 2020/21 of R38-billion and was considering ways to access ‘green finance’ through the repurposing of power stations earmarked for decommissioning in the coming years.
A request for information had been released for repurposing proposals, which Eskom was linking to the country’s plans for supporting a just transition for workers and communities vulnerable to a transition from coal to renewable energy. Eskom unveiled a “rigorous turnaround plan”, premised on operational stability, an improved income statement, a restructured balance sheet, far-reaching restructuring and an improved human resources culture. Eskom indicated that the utility would be seeking a greater tariff alignment with the National Energy Regulator of South Africa, notwithstanding significant differences of opinion, which were being dealt with through various legal review processes.
Transnet's revenues will take a knock as a result of lockdowns worldwide due to Covid-19, and this will have consequences for its loan covenants. Transnet had to close its lines for nearly five days, given that mines were not allowed to operate during the early stage of lockdown. The entity has mapped out three scenarios following the Covid-19 crisis. Even in the more optimistic scenario, Transnet expects to have revenue reduced substantially, by R8.96 billion. Transnet's more realistic scenario, which would see an extended soft lockdown, would see revenue reduced by R12.25 billion. Transnet, which is in the process of having its ports authority division corporatized into a subsidiary, had 50% of its staff operational during the lockdown period, to reduce the risk of infection and to ensure that crews would be available in the worst case where a section might have to be quarantined.
5.5 SAA and SA Express
The prospects are no better for SAA and SA Express, with the airline industry worldwide forced to ground a number of flights due to Covid-19.
While SAA's business rescue practitioners are expected to submit a business rescue plan at the end of May, employees at SA Express have already had their employment contracts suspended without pay as part of the provisional liquidation process.
The Department is leading a multi-Department effort to conceptualise a restructured SAA, and ensuring alignment with the BRPs on a sustainable business model.
South African Forestry Limited Companies Limited (SAFCOL)is not loss-making however it is not generating adequate income to enable modernization of plant and equipment. The result is a static product portfolio, with pressure on sales growth.
A new product diversification and capital investment strategy is required is required to reverse the tightening margins pressure.
The long-standing land claims need to also be addressed to ensure certainty for the SOC in its planning.
6. Committee Observations
6.1 The Committee made the following observations:
6.1.1 The Committeewelcomed the strategic plan and annual performance plan of the department, but noted with concern the unavailability of the shareholder compacts.
6.1.2 State-owned companies have been weakened financially by corruptionand have still not recovered financially.
6.1.3 SOCs have not done enough to create black industrialists and local industries and therefore there is a need for a more radical approach to advance localization and beneficiation.
6.1.4 SOCs are excluded from incentives that are provided to the private sector for job creation and they do not receive any assistance from development finance institutions.
6.1.5 SOCs are not declaring dividends to the state and have not contributed to the fiscus, however when they are in financial distress the shareholder needs to inject capital from the fiscus.
6.1.6 The Committee noted with concern thatthe Shareholder Management Bill did not feature as a deliverablein 2020/21 financial year. The Committee urged the Department of Public Enterprises to prioritize and fast-track this overarching legislation in this financial year.
6.1.7 The corporate social investment programmes of state-owned companies have not yet adequately reached out to rural and poor communities.
6.1.8 The Committee noted with concern the long-standing unresolved community issuesand the lack of legitimate structures to represent the interests of the Richtersveld community.
6.1.9The Committee was concerned with the lack of implementing the PRC recommendations for the state-owned companies.
6.1.10 The Committee expressed concern regarding the adequacy of the risk assessment tools used by the Department and the entities
6.1.11The lack of transparency regarding the nature of financial assistance given to state-owned companies by commercial financial institutions will hamper the ability of the Committee to conduct effective oversight.
6.1.12 The Committee expressed concern that there are still no remuneration standards for executives and boards of state-owned companies.
6.1.13 The Committee was not impressed that there was a very high vacancy rate in the most senior echelons of the department, with officials acting in positions for long periods of time.
6.1.14 The Committee noted with concern the ongoing court battles between the Business Rescue Practitioners and organized labour regarding the proposed retrenchments at South African Express Airways and South African Airways.
The Committee recommended that the Minister of Public Enterprises should, within the 2020/21 financial year, ensure that the Department of Public Enterprises:
7.1 advises the Committee on the establishment and operationalization of the Presidential SOE Coordinating Council, including the work the council will be doing in the implementation of the recommendations of the 2014 report by the Presidential Review Commission on SOEs. Some of the recommendations were that Government should develop theshareholder management bill, the shareholder model, SOE remuneration standards, etc,to empower the Government in its oversight of SOCs.
7.2 considers introducinga comprehensive plan to expand the corporate social investment of SOCs to rural parts of the country.
7.3 considers developing a communication strategy for all state-owned companies in order to promote the companies and educate and inform the public and rural communities about the work of SOCs and opportunities that they offer.
7.4 considers working with the Department of Trade and Industry and National Treasury in addressing localization strategies. These should include resetting of trade and investment cooperation to stimulate and support smallbusinesses and employment initiatives, reduce barriers to trade in services (which are often labor-intensive) and investments in industrial value chains.
7.5 prioritisesthe development of programmes with SOCs aimed at equipping young people with appropriate skills for the economy to address youth unemployment.
7.6 provides the Committee with shareholder compacts on an annual basis and quarterly reports on how the companies are performing in achieving targets.
7.7 ensuresthat SOCs accelerate investment and procurement programmes, promote industrialization and support small and medium enterprises that are owned by women, youth and people with disabilities.
7.8 ensures that SOCs find a balance between advancing their commercial and public mandates. They should not over-concentrate on the commercial mandate while neglecting the developmental mandate of transforming the economy and improving the quality of lives of South Africans.
7.9 ensures competent executive and board appointments in the SOCs through conducting security clearances, integrity checks, andlifestyle audits.
7.10 collaborates with the Department of Rural Development and Land Reform, in addressing long outstanding issues relating to Safcol land claims and that regular progress reports (twice a year)to the Committee.
7.11 works with the Department of Transport to ensure that a whole of state aviation strategy/policy is developed to enable the sustainability of national carrier(s).
7.12 works with the Departments of Cooperative Governance, and of Rural Development and Land Reform to ensure that the Richtersveld Mining Company and Communal Property Association are properly constituted to facilitate the successful implementation of the deed of settlement, and delivery of socio-economic development programmes to the beneficiaries.
7.13 addresses the financial and governance issues facing the state-owned companies within the Department’s portfolio and provide regular feedback to the Committee.
7.14 works with the Department of Cooperative Governance and Traditional Affairs and other relevant parties to resolve the municipal debt owed to Eskom and provide feedback to the Committee on this process quarterly.
7.15 fills all vacant positions within the Department of Public Enterprises by the end of the financial year.
7.16 develops post COVID-19 strategies, plans and actions and include them in their budget, plans and SOC shareholder compacts.
7.17reports every second quarter to the Committee on progress being made.
Having considered the Budget Vote and theAnnual PerformancePlan of the Department of Public Enterprises, the Committee recommends that the House passes the budget. The Democratic Alliance reserved their right to support the report whilst the Economic Freedom Fighters did not support the report.
Report to be considered.
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