ATC201118: Budgetary Review and Recommendation Report of the Portfolio Committee on Public Enterprises, dated 18November 2020

Public Enterprises

Budgetary Review and Recommendation Report of the Portfolio Committee on Public Enterprises, dated 18November 2020

 

The Portfolio Committee on Public Enterprises (hereinafter referred to as the Committee), having considered the performance of the Department of Public Enterprises for the 2019/20 financial year, reports as follows:

 

1          INTRODUCTION

 

1. 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.

 

1.  

 

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.

 

1.  

 

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 BRRR concerning the Department of Public Enterprises by the Portfolio Committee on Public Enterprises is presented. 

 

 

 

1.  

 

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 and a briefing from the Office of the Auditor-General of South Africa (AGSA)on the audit outcomes of the Department and its entities on 4November 2020,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.

 

1.  

 

The Budget 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.
• Committee recommendations.

 

2          OVERVIEW OF THE POLICY ENVIRONMENT

 

The OECD states that, the most serious pandemic in a century has triggered one of the worst economic crises since the Great Depression. Countries reacted with often strict containment and mitigation policies, which effectively limited the spread of the virus and avoided the collapse of health care systems and most importantly limited the number of fatalities. The combination of great uncertainty, fear of infection, individual restraints following public guidelines and mandatory lockdowns, however, immediately produced a sharp contraction in economic activity. The most serious pandemic in a century has triggered one of the worst economic crises since the Great Depression. Countries reacted with often strict containment and mitigation policies, which effectively limited the spread of the virus and avoided the collapse of health care systems and most importantly limited the number of fatalities. The combination of great uncertainty, fear of infection, individual restraints following public guidelines and mandatory lockdowns, however, immediately produced a sharp contraction in economic activity. In the first months of the crisis, new unemployment claims have soared in many countries and projections suggest that in the OECD area the unemployment rate will be much higher than at the peak of the global financial crisis. But the extent of the shock on the labour market is much larger: despite a massive shift towards telework, in all countries the number of those effectively working collapsed as companies have frozen hiring and put part of their workforce on hold through subsidised job-retention schemes. Available evidence also suggests that vulnerable groups – the low skilled, youth and migrants – as well as women are paying the heaviest toll of the crisis.

 

State owned companies are also facing challenges as the results of the pandemic. Some of them are facing business rescue, administration and restructuring process which might affect labour market outcomes.  

 

In his State of the Nation Address held on the 13thFebruary 2020, the President stated that: Several state-owned enterprises (SOEs) are in distress, and government public finances are under severe pressure.Government is 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.
• Government 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.
• Government 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.
• Government will negotiate supplementary power purchase agreements to acquire additional capacity from existing wind and solar plants.
• Government 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. 

The Minister of Finance stated in his supplementary budget speech that COVID-19 has turned the global economy upside down. In February governmentexpected the global economy to expand by 3.3 per cent in 2020. We now expect a global contraction of 5.2 per cent this year. This will bring about the broadest collapse in per capita incomes since 1870. Throughout the world, tens of millions of workers have lost their jobs. South African unemployment increased by one percentage point, reaching 30.1 per cent in the first three months.

The South African economy is now expected to contract by 7.2 per cent in 2020. This is the largest contraction in nearly 90 years. Inflation will likely to register 3 per cent in 2020. Commodity price increases and a weaker oil price have softened the blow, but as a small open economy reliant on exports South Africa have been negatively affected by both the collapse in global demand and restrictions to economic activity.

 

2.1 Key Policy Focus for the Department of Public Enterprises

 

The Department of Public Enterprises is government’s shareholder representative for the state‐owned companies in its portfolio. The department’s mandate is to fulfil oversight responsibilities at these companies to ensure that they contribute to the realisation of government’s strategic objectives, as articulated in the National Development Plan, government’s 2019‐2024 medium‐term strategic framework and the reimagined industrial strategy. 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.

 

 

1. SUMMARY OF PREVIOUS YEAR BRRR Recommendations MADE BY THE COMMITTEE

 

1. The Committee recommends that the Minister of Public Enterprises should:

3.1.1     Discourage having officials acting in positions for long periods within the Department and ensure that all vacancies are filled, particularly those of the Director-General and all Senior Management Services (SMS) within this financial year.

3.1.2     Ensure the capacitation of the internal audit function in the Department and State-Owned Companies to institute audit and risk assessments in boards in line with the provisions of the Public Finance Management Act.

3.1.3     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. 

3.1.4     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.

3.1.5     Present the Committee with a funding plan, cost containment and revenue maximisation strategy for Eskom, SAA, Alexkor, SAX and Denel before the end of the financial year.

3.1.6     Ensure that shareholder compacts are signed on time and submitted to the Committee to enhance its oversight role within a month of signing.

3.1.7     Present a model for SOC oversight per programme, with clear targets on monitoring, evaluations and reporting within this financial year.

3.1.8     Present progress report to the Committee on the SOC restructuring process and the unbundling of Eskom into three entities namely: Generation, Transmission and Distribution.

3.1.9     Improve communication in SOCs in order to educate the public on the role of SOCs, their capabilities and their developmental role in the economy.      

3.1.10   Ensure that all SOCs meet performance targets on skills development, job creation and localisation strategies and provide the Committee with reports.

3.1.11   Provide the Committee with reports on the assessments on sales of non-core assets of SOCs.   

3.1.12   Provide the Committee with progress update efforts to ensure Alexkor achieves its public and commercial mandate, especially addressing socio-economic outcomes of the Richtersveld and Alexandra Bay communities.

3.1.13   Ensure that the future role of SAFCOL is clarified and that the commercial and public mandates are diversified and expanded, and community land claims issues are resolved.

3.1.14   Ensure that all the recommendations by the Auditor-General are sufficiently addressed and progress reported to the Committee on a regular basis.

3.1.15   Ensure that there is ethical leadership in boards and ensure appropriate sanction for breaches and transgressions in SOCs.

3.1.16   Ensure that all board members and executives of state-owned companies are vetted and are subjected to a lifestyle audit within this financial year.

3.1.17   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.

3.1.18   Provide the Committee with quarterly progress reports regarding the implementation of these recommendations, and

3.1.19   Provide the Committee with timeous updates in writing on developments and events that could potentially adversely affect SOCs or the public. This information should be submitted to the Committee shortly after receiving the information or date of incident.   

 

1. Overview and assessment of financial performance

 

Chapter 13 of the National Development Plan identifies the potential of state‐owned companies to build acapable and developmental state. This is given expression by priority 1 (economic transformation and job creation) of government’s 2019‐2024 medium‐term strategic framework, with which the mandates of state-owned companies are closely aligned. In overseeing state‐owned companies’ fulfilment of their mandates, over the medium term the Department of Public Enterprises will continue to focus on enhancing reforms to stabilisestate‐owned companies, and strengthening its oversight capacity to ensure that the state‐owned companies inits portfolio are sustainable and contribute to investment in key infrastructure.By ensuring that these companies contribute to lowering the cost of doing business in South Africa, thedepartment aims to reduce the burden of administered prices on the economy by reducing the cost of electricityand freight transport. The department oversees the operations of 7 state‐owned companies (Alexkor, Denel,Eskom, South African Airways, South African Express Airways, the South African Forestry Company and Transnet) to ensure that appropriate investments are made to create jobs and sustain economic growth. Total expenditure decreases at an average annual rate of 66.6 per cent, from R56.9 billion in 2019/20 toR2.1 billion in 2022/23. This is due to significant additional allocations made to state‐owned companies in 2019/20. Excluding payments for financial assets, compensation of employees is the department’s largest costdriver, spending on which is expected to increase at an average annual rate of 8.8 per cent, from R170.2 millionin 2019/20 to R219.1 million in 2022/23. However, in 2019/20 Cabinet approved baseline reductions amountingto R9.6 million over the MTEF period on the department’s compensation of employees, and goods and servicesbudgets. The department is in the process of implementing a realigned organisational structure, which is expected to enable it to be responsive and efficient in fulfilling its oversight and monitoring role.

 

1. Enhancing reforms to stabilise state‐owned companies

 

Based on the 2013 report of the presidential review committee on state‐owned entities, in 2018 Cabinetapproved a number of reforms for state‐owned companies. These include determining an appropriateshareholder ownership model and an overarching shareholder policy, and developing a standardised approachto the appointment of boards for state‐owned companies. Accordingly, by 2020/21, the department expects todevelop a state‐owned enterprise bill and a shareholder management policy. The legislation and policy will bedrafted with the intention of improving state‐owned companies’ overall performance in terms of: setting explicitgoals; ensuring that boards and management monitor performance effectively; and transparently and directly linking executives’ performance incentives with desired outcomes, including audit outcomes. Once ashareholder management policy is adopted and a performance evaluation framework is put in place, boards’performance will be evaluated annually.

 

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 combinedbudget for these programmes is expected to decrease at an average annual rate of 67.6 per cent, fromR56.7 billion in 2019/20 to R1.9 billion in 2022/23. This is due to an additional R56.6 billion allocated in 2019/20to settle state‐owned companies’ debts and provide working capital. Excluding provisional allocations to Eskom and South African Airways over the medium term, additional allocations will be made over the medium term including R33 billion for Eskom in 2020/21; R9.9 billion for South African Airways (R3.8 billion in 2020/21, R4.3 billion in 2021/22 and R1.8 billion in 2022/23); R576 million for Denel in 2020/21; and R164 million for South African Express Airways in 2020/21. Additional allocations to state owned companies will be used to settle government guaranteed debt and for working capital in certain instances, and are subject to conditions that include restructuring, the implementation of turnaround plans, the review of business models, the sale of non‐core assets and the identification of strategic equity partners, amongst other things. Over the MTEF period, the department intends to closely monitor and assist the state‐owned companies in implementing and complying with these conditions.

 

1. Strengthening oversight capacity

 

In 2019/20, the department concluded an assessment to identify risk and governance shortfalls in state‐owned companies. It intends to work with the companies to develop and implement a state‐owned company’s risk and integrity framework by 2021/22. The framework will be geared towards establishing minimum norms and standards as measures to restore good corporate governance within state‐owned companies. With regards to specific state‐owned companies, over the medium term, the department plans to oversee the implementation of the 2019 roadmap for Eskom in a reformed electricity supply industry, which aims to transform and stabilise the company. The department also plans to work closely with the business rescue practitioners for South African Airways and monitor the implementation of their recommendations. The viability of the corporatisation of Transnet’s National Ports Authority will also be assessed over the period ahead. This is in line with findings from the World Bank suggesting that rail, ports and pipeline infrastructure managed by a single company could create conflicts of interest that negatively impact on the overall performance of a country’s freight system.

 

 

Since the 2020 Budget, responding to the COVID-19 pandemic has become government’s central priority. The crisis has required frontline functions – primarily health, peace and security, and social development – to focus and scale up their efforts. Other departments have been required to reprioritise funding to complement these efforts and roll out their own responses. At the same time, restricted economic activity has caused sharp declines in general revenue across general government. The Special Adjustments Budget outlines immediate revisions to the 2020/21 spending plans set out in the 2020 Budget Review.

 

In April 2020 the President announced a R500 billion fiscal support package towards COVID-19 priorities.Part of the funding sources for this package is R130 billion baseline reprioritisation in the 2020/21 financial year.Of the R130 billion, R100 billion is expected to come from the national sphere while R30 billion will come from provincial sphere. Departments and institutions are therefore expected to contribute to the R100 billion either through implementing cost containment measures; scaling, closing down or postponing programmes to future years.

 

 

1. ANALYSIS OF THE REVISED BUDGET ON EACH PROGRAM

The Department of Public Enterprises revised its budget in line with the supplementary budget.

Table 1 Budget overview 2020/21

ECONOMIC CLASSIFICATION	Approved Budget	20% Reduction	Revised Budget
	R'000	R'000	R'000
Compensation of Employees	197 122	-30 000	167 122
Goods & Services	108 736	-31 871	76 865
Transfers & Subsidies	17	0	17
Payments for Capital Assets	3 480	0	3 480
Payments for Financial Assets	-	0	-
Sub-Total	309 355	-61 871	247 484
Payments for Financial Assets (SOCs)	37 540 000	0	37 540 000
TOTAL	37 849 355	-61 871	38 096 839

Source: Department of Public Enterprises (2020)

 

The Department of public enterprises had to adjust the budget in line with response to the pandemic. The Department was affected by budget cuts which mostly affected compensation of employees and goods and services.

 

1. Financial Performance 2019/20

 

During the 2019/20 financial year, the Department spent its 2019/20 budget in the following manner:

 

Table2 Expenditure per programme

Programme	Final Appropriation (R’000)	Expenditure (R’000)	Variance (R’000)	Expenditure as per % of Final Appropriation
1. Administration	163 121	149 077	14 044	91.4%
2. SOC Governance Assurance & Performance	41 613	36 880	4 733	88.6%
3. Business Enhancement, Transformation & Industrialisation	78 254	60 391	17 863	77.2%
Sub-Total	282 988	246 348	36 640	87.1%
Transfer to SOCs	56 600 042	56 600 041	1	100.0%
Total	56 883 030	56 846 389	36 641	99.9%

Source: Department of Public Enterprises (2019/20)

 

 

Table 3 Expenditure per economic classification.

 

Economical Classification	Final Appropriation R’000	Expenditure R’000	Variance R’000	Expenditure as per % of Final Appropriation
Current Payments	270 148	233 992	36 156	86.6%
- Compensation of Employees	170 228	149 189	21 039	87.6%
- Goods and Services	99 920	84 803	15 117	84.9%
Transfers and Subsidies	8 607	8 128	479	94.4%
- Public Corporations & Private Enterprises	4 017	3 589	428	89.3%
Households	4 590	4 539	51	98.9%
Capital Assets	4 233	4 228	5	99.9%
- Machinery and Equipment	4 200	4 197	3	99.9%
- Intangible Assets	33	31	2	93.9%
Payments for Financial Assets	56 600 042	56 600 041	1	100.0%
Total	56 883 030	56 846 389	36 641	99.9%

Source: Department of Public Enterprises 2019/20

 

According to the Department, the spending for the period ending March 2020 is 99.9% (R56.8 billion of R56.9 billion). The total spending excluding payments for financial assets or transfers made to SOCs as at end of March 2020 was 87.1%.  The spending includes amounts of R49 billion, R5.5 billion, R1.8 billion and R300 million transferred to ESKOM, SAA, DENEL and SA Express respectively for working capital and settlement of Government guaranteed debts. The Appropriation Act (24 of 2019) was assented to by the President on 8 August 2019 and the Minister of Finance has invoked section 6(1)(b) of the Act to authorize expenditure to the SOCs in view of their current financial positions.The spending on Compensation of Employees (COE) and Goods & Services was 87.6% and 84.9% respectively - lower than budget. This was as a result of unfilled posts and the non-implementation of the development of the Green Paper for the Shareholder Management Bill. The spending on Transfers and Subsidies was 94.4% (R8.1 million) of the budget (R8.6 million) which is for Households and Payments to Public Corporations.

 

 

1. Auditor-General Report

The Auditor General of South Africa (AGSA) has expressed an unqualified audit opinion with findings for the year 2019/20. DPE regressed due to material misstatements identified on financial statement submitted for the audit. The areas of material misstatement in Annual Financial Statements subsequently corrected by management were:

• Related parties – relationships and transactions between DPE and SOEs not adequately disclosed
• Impairment of investments
• Contingent liabilities

 

1. Entities

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 deteriorated in the period under review, with some entities unable to satisfy the going concern criteria, which prevented the entities from submitting their annual report to Parliament by 30 September 2020. 

 

1. Alexkor

Alexkor was established in terms of the Alexkor Limited Act (1992) to mine marine and land diamonds inAlexander Bay, Northern Cape. Over the medium term, the company will continue to execute its remaining deedof settlement obligations, which include the transfer of public and residential properties to the Northern Capegovernment and the Richtersveld community.In 2018/19, Alexkor experienced financial challenges due to the poor performance of the Alexkor RichtersveldMining Company Pooling and Sharing Joint Venture. Despite a 31.3 per cent increase in diamond production in2018/19 (63 000 carats) compared to 2017/18 (48 000 carats), revenue in 2018/19 was constrained due to thepoor quality of diamonds mined. This was exacerbated by an unsustainable corporate structure and cost base.Alexkor generated revenue of R209.9 million in 2018/19, a 1 per cent increase from the previous year’s revenueof R208.6 million. The company reported a loss of R149.6 million in 2018/19 compared to a profit ofR34.2 million 2017/18. In 2019, the department appointed an administrator to oversee the business and ensurethat the company is appropriately restructured. As such, the department’s immediate focus is to review thecurrent operating structures of Alexkor to restore the sustainability of its operations.

 

According to the Department, the SOC reported a loss for the 2019/20Financial Year (FY). Alexkor does not have any other revenue generating activities and depends solely on the income from the PSJV. The performance of the PSJV has been erratic because of poor management, corruption and low diamond prices. Consequently, the PSJV’s liquidity challenge has had a substantial impact on Alexkor’s financial position. Alexkor is therefore not a going concern. Alexkor’s cash reserves are expected to be depleted by September 2020. The DPE is not able to provide further funding to Alexkor. Without an ability to generate revenues, the SOC is unable to access financial markets, and neither can it request support from the fiscus.There are no projections for the 2020/21 financial year due to the winding down of the Alexkor head office.

 

The Committee is concerned with the future sustainability of Alexkor. In this financial year Alexkor was unable to submit its annual financial statements as a result an audit could not be performed.  An administrator has been appointed to deal with challenges facing the entity. The Committee is concerned with the operational and financial challenges of Alexkor which are resulting in employees not being paid and in some cases, retrenched. The depletion of cash reserves resulting from losses made by Alexkor and the PSJV will lead to a decline in the socio-economic development outcomes of the communities in the Richtersveld and Alexandra Bay. The department should seek ways to address the legacy issues such as the implementation of the Deed of Settlement (DoS), the establishment of the Community Property Association (CPA), township establishment and community rehabilitation programme. The department should provide the Committee with the future role for Alexkor in light with the challenges faced by the SOC.

 

1. Denel

Denel was incorporated as a private company in 1992 in terms of the Companies Act (1973), with the South African government as its sole shareholder. It operates in the military aerospace and landward defence environment, and provides strategic defence equipment. Denel supplies the South African National Defence Force with strategic and sovereign capabilities. The company’s broad focus over the medium term will be on restructuring, which entails optimising its cost structure and reviewing its business model to improve its global competitiveness. Emphasis will also be placed on the company’s internal cost structure, efficiency, effectiveness, disposal of non‐core businesses, improved supply chain policies and alignment of IT infrastructure with its new organisational structure. In 2019/20, the company commenced with its restructuring process, which is focused on optimising labour, consolidating its group corporate structure, reviewing its property portfolio and plant utilisation, and introducing strategic sector participation.

 

The restructuring process was necessitated by the company’s steady decrease in revenue over the past 4 years. Total revenue generated in 2018/19 was R3.8 billion compared to R8.2 billion in 2015/16. A loss of R1.7 billion was recorded in 2018/19 compared to a loss of R1.1 billion in the previous year. This decrease in revenue was mainly due to liquidity challenges that constrained operations and, in turn, affected sales. However, cost savings and restructuring initiatives that are already in place, as well as recapitalisation allocations from the department (R1.8 billion in 2019/20 and R576 million in 2020/21) are expected to stimulate revenue generation through the expansion of the company’s export base and improvement of its access to markets. Accordingly, the company expects to increase its revenue to more than R7 billion by 2022/23.

 

Denel’s equity has been significantly below the levels (R4billion) required by investors. This is mainly due to low profits and losses recorded over the years.Denel’s equity level has decreased substantially despite the equity injection of R1.8bn that was disbursed in the 2019/20FY. Furthermore, R576 million has been allocated for the 2020/21 financial year, but has not been disbursed. The SOC’s assets are predominantly funded by debt.The projections for the 2020/21 financial year are expected to be revised due to the impact of COVID-19.

 

The Committee observed that Denel faced operational challenges resulting from financial challenges. This resulted in employee salaries not paid and decline in productivity in some of the business units. The departure of Denel CEO has left the company with governance challenges. This will impede the implementation of the SOC’s turnaround strategy.

 

 

1. SAFCOL

The South African Forestry Company was established in 1992 in terms of the Management of State Forests Act (1992). It is mandated to ensure the sustainable management of plantation forests, increase downstream timber processing, and play a catalytic role in rural economic development and transformation. Over the medium term, the company plans to continue fulfilling its commitments to communities near its operations, and diversify its product offering by increasing its production of timber for public facilities, poles for the electricity distribution sector, and furniture. The company supports communities around its operations, and is developing suitable land settlement models in partnership with the newly formed Department of Agriculture, Land Reform and Rural Development.

 

Although revenue increased from R926.4 million in 2017/18 to R1 billion in 2018/19, the company recorded a loss of R117.6 million in 2018/19, increasing from R80.2 million in the previous year as a result of a decrease in demand for timber, and delays in upgrading obsolete equipment. Revenue is expected to increase to R1.6 billion in 2021/22 as a result of planned investments in new projects.

 

According to the DPE, for the 2019/20 financial year, the SOC reported a loss of R47 million. This is mainly as a result of the decline in revenue and high operating expenses. Without the fair value adjustment, the loss for the year would have been worse.The SOC needs to re-invest in its capital assets and operations. The Department is concerned that the company’s performance has been stagnant over the past 10 years. The projections for the 2020/21 financial year are expected to be revised due to the impact of COVID-19.

 

The Committee is concerned about SAFCOL’s future role as a result of legacy issues such as land claims. The developments with regards to its subsidiary IFLOMA are noted. The issues on land claims are a concern as no progress is reported annually. A recommendation in the previous year’s BRRR was made for the Department to find mechanisms to resolve the impasse through interface of Ministers, the Economic Sectors, Employment and Infrastructure Cluster and a Cabinet decision. Progress report regarding this is yet to be tabled to the Committee.

 

 

1. Eskom

Eskom is governed by the Eskom Conversion Act (2001) and is mandated to generate, transmit and distributeelectricity to industrial, mining, commercial, agricultural and residential customers and redistributors. Eskom generates 95 per cent of the electricity used in South Africa and 45 per cent of the electricity used in Africa.

 

Eskom poses a significant risk to the fiscus and to the economy in general owing to poor performance and an unsustainable debt burden of R480 billion. Operational challenges and financial constraints at Eskom, together with higher electricity tariffs and declining demand in a low-growth environment have affected the performance of the electricity sector.

 

Decisive actions by both the government and Eskom itself are required. In addition to R230 billion financial support over the next ten years, as announced in the February 2019 Budget, Eskom will receive an additional R59 billion as per the 23 July 2019 Special Appropriation Bill. A two-phased timetable for Eskom’s restructuring has been put forward, with the first phase comprising the functional separation of the entity into three separate units, and the second phase involving the legal separation of the distribution and generation functions.

 

The recently gazetted Integrated Resource Plan (IRP) 2019 provides some clarity on South Africa’s electricity requirements and how they will be supplied over the period up to 2030, indicating a more diversified energy mix with increasing contributions from renewable energy sources. As part of the risk management plan, the DMRE has issued the Determination of Section 34 of the Electricity Regulation Act for both the Emergency energy procurement and the new Bid Window to assist with the low plan availability of Eskom. Sustained, reliable and cost-effective energy supply is critical to business planning, fixed investment decisions and overall economic growth.

 

Inresponse to the company’s persistent financial, operational and structural challenges, in 2019 it was announcedthat Eskom will be unbundled into three subsidiaries (generation, transmission and distribution) under a holdingcompany, Eskom Holdings. This announcement led to the drafting and adoption of the 2019 roadmap for Eskomin a reformed electricity supply industry, which outlines actions to overcome the crisis, defines key steps intransforming the electricity supply system, addresses steps to restore the company’s finances, identifiesmeasures to reduce the company’s cost structure and details the process of restructuring the entity.

 

However, while the roadmap has been adopted and a nine‐point plan to improve generation is in place, Eskom’scoal generation plants have been performing poorly due to an ageing fleet, poor maintenance practices andpoor performance of new units within the Medupi and Kusile power stations. As a result, rotational loadshedding has been implemented because of insufficient capacity to meet demand. Although some progress has been made, Eskom’s operational performance remains inadequate, with persistent technical and plant faults.The company aims to address supply constraints through interventions as set out in the nine‐point plan, whichare short‐term, medium‐term and long‐term in nature. These interventions primarily involve fixing new plantdefects, reducing trips and full load losses, accelerating the return of serviced units on long‐term forced outages,fixing partial load losses and boiler tube leaks, rebuilding coal stockpiles, increasing diesel stocks and recruitingcritical staff for the generation division.Eskom’s revenue increased from R177.4 billion in 2017/18 to R179.9 billion in 2018/19. Profit before depreciation and amortisation and net fair value loss decreased significantly, from R45.4 billion in 2017/18 to R31.5 billion in 2018/19. The company’s loss for the year increased significantly, from R2.3 billion in 2017/18 to R20.7 billion in 2018/19, mainly due to high primary energy costs, depreciation and finance costs. To stabilise Eskom’s financial position in the short term, an additional R33 billion has been allocated to the company in 2020/21 through the Special Appropriations Act (2019) in addition to the provisional allocation of R23 billion. These allocations are subject to conditions, which include providing updates on strategies to manage municipal and other consumer debts, coal contract renegotiation and cost containment measures.

 

According to the DPE, the increase in revenue is underpinned by the increase in tariffs.Although the cash from operations (EBITDA) is increasing, it is not sufficient to cover increasing costs.The value of the shareholder (equity) has been eroded by increasing debt.The business is not generating returns for the shareholder.The projections for the 2020/21 financial year are expected to be revised due to the impact of COVID-19.

 

The Committee notes with concern the financial challenges experienced at Eskom. Whilst the cost drivers were determined and outlined in Eskom’s financial report to the Committee as the cost of debt, operational expenses and non-payment from municipalities. The Committee is concerned with higher costs associated with the build programme and non-performance of new units. The challenges experienced on the technical design of the build programme is also a concern. The Department of Energy introduced the Integrated Resource Plan (IRP) 2019 targeting the optimisation of energymix. The Department of Public Enterprises needs to outline the role of Eskom in the attainment of the programme objectives. Further calls for the introduction of renewable energy should be viewed in light with the electricity demands. The guaranteed utilisation associated with Eskom has increase to R400 billion placing Eskom’s liquidity under pressure. The Committee will provide oversight and guidance on the policy pronouncement by government on the unbundling of Eskom into three entities namely; generation, transmission and distribution.  The lack of permanent Chairperson poses a risk on the governance of the entity.

 

1. Transnet

Transnet provides and operates freight transportation services and infrastructure. The company’s currentoperating model is geared towards lowering the cost of doing business in South Africa. As such, Transnet aims to improve the competitiveness of South African goods and services to stimulate economic growth and ensure the security of supply in providing ports, rail and pipeline infrastructure in a cost‐effective manner.To sustain and expand its capacity, over the five‐year period ending 2024/25, Transnet plans to invest R153.5 billion in capital expenditure, particularly in rail, port and pipeline infrastructure, across its operating divisions. The company is also addressing operational challenges with regards to rail and ports, with the aim of improving performance and increasing the volume of freight transported by rail. The department is investigating the implications of giving effect to the National Ports Act (2005) to ensure that this is done in a manner that is prudent and responsible. This is especially in light of volumes transported on rail by Transnet having decreased from 226.3 million tons in 2017/18 to 215.1 million tons in 2018/19, and port container volumes decreasing from 4.7 million 20‐foot equivalent units in 2017/18 to 4.5 million 20‐foot equivalent units in 2018/19. Revenue increased by 1.6 per cent, from R72.9 billion in 2017/18 to R74.1 billion in 2018/19, mainly due to a 9.1 per cent increase in petroleum volumes. The company generated a net profit of R6 billion in 2018/19, increasing from R4.9 billion generated in 2017/18, and has remained self‐sustaining. Transnet contributes significantly to public infrastructure investment. In 2018/19, R17.9 billion was spent on capital projects, bringing the company’s total investment over the last 7 years to R183.5 billion.

 

According to the DPE, revenue performance grew only marginally by 3% to R75billion in 2019/20 due to lower than previous demand. The decline was associated with low demand and therefore, low volume performance. According to the Corporate Plan, revenue was expected to increase to R78billion, but due toCovid-19 and disaster management regulationsmake it unlikely that this will be achieved.Net profit decreased to R3,9bn in 2019/20 due mainly to valuation relation adjustments, in line with contracted expectations of future cashflows. Net profit was projected to increase to R0.3bn according to the Corporate Plan.  Transnet equity decreased in 2019/20 in line with a negative effect of asset valuations, impairments and fair value adjustments, but was expected to increase again to R145,4billion in 2020/21 per the Corporate Plan.

 

The Committee notes Transnet’s performance has been significantly affected by the pandemic. The Committee commend Transnet for performing well under a distressed economic environment. The Committee urges the department to continue monitoring Transnet as there are still challenges emanating from the previous year’s report on irregular and fruitless expenditure. The efficiency and effectiveness of the port systems and rail system could be enhanced for improved performance. The Committee further observes that Transnet’s asset valuation capacity could be enhanced and improved.

 

1. South African Express Airways

South African Express Airways serves as a regional air carrier mandated to provide transportation and other related aviation services on low‐density domestic and African regional routes. The airline faces serious financial and liquidity challenges, and was grounded by the South African Civil Aviation Authority in May 2016, May 2018 and August 2019. The airline’s continuing liquidity challenges are driven by a number of factors, including: unfavourable contracts entered into with service providers, an inability to raise financing facilities with local banks, suppliers placing the airline on a cash basis and demanding very stringent payment plans to settle old debt, and increased legal expenses due to disputes with suppliers where proper procurement processes were not followed. The airline resumed operations in August 2018 with a new turnaround strategy focusing on governance, profitability, operations, customer service and human capital. The strategy mainly includes initiatives to optimise the airline’s route network, cancel or renegotiate contracts and agreements, strengthen revenue collection and management, fill key positions and reduce employee costs, enhance its organisational culture and values, and improve schedule and aircraft reliability. The airline’s current business model is unsustainable and is being reviewed as part of the plan to consolidate the two state‐ownedairlines. The placing of South African Airways under business rescue provides a structured opportunity to reorganise state aviation assets to better position them as sustainable and attractive to investors. The airline received a recapitalisation allocation of R1.2 billion in 2018/19, which was earmarked for the repayment of government guaranteed debt, and an additional R300 million in 2019/20. These allocations temporarily restored the solvency of the airline. In 2020/21, R164 million has been allocated to eliminate government’s contingent liability exposure, relating to aircraft lease payments and letters of credit.

 

SA Express was placed under business rescue in February 2020. Joint Business Rescue Practitioners were appointed to turn around the airline. The Business Rescue Practitioners were unable to submit a credible business case to raise the Post Commencement Finance for the entity to continue operating.The airline was then placed under provisional liquidation by way of a Court order on 29 April 2020 by the High Court.  On 6 May 2020 the Master of the High Court appointed joint provisional liquidators. The provisional liquidators advertised expression of interest for the sale of the business, and should there be no interest from any potential investor, there is likelihood that the airline may be liquidated on 30 September 2020.

 

1. South African Airways

South African Airways operates a full‐service network in the international, regional and domestic markets. The airline is responsible for promoting air links with South Africa’s key business, trading and tourism markets across the world, and contributing to key domestic air linkages.

 

In December 2019, South African Airways was placed under business rescue to restore confidence in the airline and safeguard the company’s assets. The business rescue process is also intended to restructure and reposition the company towards greater sustainability and attract strategic equity partners. Over the medium term, the airline’s future will be guided by the recommendations of its business rescue practitioners. This is expected to take place in conjunction with the continued implementation of the company’s long‐term turnaround strategy, which aims to assist the airline in returning to solvency and profitability. The company refined its long‐term turnaround strategy in 2019/20 to focus on: liquidity and balance sheet restructuring, revenue stimulation and network optimisation, organisational design, supply chain transformation, and business process transformation at South African Airways Technical. In 2019/20, R5.5 billion was allocated to South African Airways for repayment of debt and working capital. Over the MTEF period, R9.9 billion (R3.8 billion in 2020/21, R4.3 billion in 2021/22 and R1.8 billion in 2022/23) has been allocated to the airline for the repayment of government guaranteed debt and the provision of working capital. The airline is expected to continue relying on government support under business rescue. The airline generated revenue of R27.1 billion in 2018/19 and recorded a provisional loss of R4.9 billion, compared to R28.1 billion and R5.4 billion, respectively, in 2017/18. As losses were anticipated in 2018/19 and 2019/20, government allocated R5 billion to the airline in 2018/19. This was in addition to the R10 billion allocated to the company in 2017/18. However, despite these recapitalisations, South African Airways remains insolvent, with its liabilities exceeding its assets by R13 billion at the end of 2018/19.

 

The airline was placed under business rescue in December 2019 due to declining performance and its inability to pay its debts as they fall due. The Business Rescue Plan was approved in July 2020 by creditors. Various options of raising funds to implement the business rescue plan are being considered. This includes reviewing unsolicited offers by various potential partners to providing funding for the airline. This is being carried out with the assistance of Rand Merchant Bank that have been appointed as Transaction Advisor to ensure that the best option of securing funding is chosen.

 

 

The Committee notes achievement made in the programme. The current operational and financial performance of SAA and SAX is concerning. The Committee is concerned about the governance of SAA as it is placed under business rescue. It is critical that the Minister is briefed on timeously process. The airline did not submit its annual financial results to the Committee resulting in an audit not being performed. SAA’s debt has increased to R10. 5 billion. The Committee is concerned with the SAA’s inability to implement a sound turnaround plan. It is imperative for the department to design clarity of critical levers which will set the airline on a path to being more competitive. Policy pronouncement on a strategic equity partner should be considered. An approach towards ensuring that problems presented to the Committee by the employees at SAX are addressed should be presented to the Committee. A recommendation made in the previous BRRR was rationalisation of state aviation assets which will pave a way of merging SAA, Mango and South African Express Airways into a single entity. The department should provide a progress report regarding this recommendation in line with policy calls for a new airline. The DPE recently announced that SAA will not be liquidated. The Minister of Finance during the Medium-Term Budget Policy Statement (MTBPS) allocated R10.5 billion towards SAA business rescue plan. This allocation is funded through reductions to the baselines of national departments, public entities and conditional grants. This allocation is in addition to the R16.4 billion allocated over the 2020 MTEF in the February Budget for settling guaranteed debt and interest.

 

1. Concluding comments on financial performance

The financial performance of state-owned companies, which has placed considerable pressure on the public finances for several years, is likely to deteriorate in 2020/21. The pandemic and associated economic restrictions are expected to reduce revenues for entities. Global market volatility may further limit the ability of state-owned companies to borrow in capital markets and service their debt obligations. The COVID-19 pandemic underlines the urgent need for broad-based reforms at state-owned companies so that they can become efficient and financially sustainable. These reforms include rationalisation (reducing the number of and merging some state-owned companies, and incorporating certain functions into government), equity partnerships, and stronger policy certainty and implementation. Planned transfers from the fiscus will be strictly conditional on improving their balance sheets.

 

All the programmes within the Department have been affected by the COVID-19. The main budget in all programmes has been affected by the suspension of funds for COVID-19. Most of the interventions are aimed at social programmes such as health, economic such as unemployment and state interventions. COVID 19 interventions outlined in government gazetted regulations will affect the environment in which the Department execute its mandate. Compensation of employees and goods and services has also been affected by the suspension of funds for COVID-19 purposes.

 

1. Overview and assessment of service delivery performance

 

1. Service Delivery Performance for 2019/20

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, state-owned companies’ governance assurance and performance and business enhancement, transformation and industrialisation. The section below discusses programme performance.

 

1. Performance Information by Programme
   1. Programme 1: Administration

a) Purpose

 

Provides strategic leadership management and support services to the department. The programme includes the Ministry, the Office of the Director-General and Support Services. The programmes currently comprise the following sub-programmes: Ministry; Management, Corporate Services; the Chief Financial Officer; Human Resources; Communications; Strategic Planning, Monitoring and Evaluation and Internal Audit.

 

b) Performance outputs to achieve the strategic objectives

 

The programme had two targets for the financial year and one target was achieved. The details of the progress made are providedin the table below:

 

Programme 1: Administration and Corporate Management
Strategic objectives	Actual achievement 2018/19	Planned target 2019/20	Actual achievement 2019/20	Deviation from planned target to actual achievement for 2019/20	Comment on deviations
Promote the development of a strong shareholder	Shareholder Management Policy developed, but was not submitted to Cabinet	Green Paper for the SOE Bill developed	Not achieved Green Paper for the SOE Bill not developed	The PSEC has been mandated to develop the overarching Act governing the SOEs	None
Promote alignment and efficiency across institutional model	22 training interventions provided in line with the Workplace Skills Plan (WSP)	20 training interventions provided (WSP)	Achieved 42 training interventions provided	There were additional training interventions required	None

 

 

c) Linking performance with budgets

Expenditure on the programme amounts to R149.1 million or 91.4% of the total budget of R163.1 million in 2019/20, while expenditure for the 2018/19 financial year totalled R136 million or 89.5% of the total budget of R151.9 million. The primary cost drivers under Goods and Services include Travel and Subsistence, Operating Lease, Property Payments, Computer Services and Audit Fees.

 

 

1. Programme 2: SOC Governance Assurance and Performance

 

1. Purpose

Provide and enforce SOCs governance, legal assurance, financial and non-financial performance monitoring, evaluation and reporting systems, in support of the shareholder, to ensure alignment with government’s priorities.

 

b) Performance outputs to achieve the strategic objectives

 

Sub-programme: Governance, Legal Assurance, Risk Profiling and Mitigation
Strategic objectives	Actual achievement 2018/19	Planned target 2019/20	Actual achievement 2019/20	Deviation from planned target to actual achievement for 2019/20	Comment on deviations
Promote the development of a strong shareholder	Five existing Boards reviewed and five new Boards appointed	Board performance evaluation framework developed	Achieved Board performance evaluation framework was developed	None	None
	None	Report on monitoring SOC compliance with the norms and standards on MOIs produced	Achieved Report on monitoring SOC compliance with the norms and standards on MOIs was produced	None	None
	Shareholder Anti-Fraud and Corruption Hotline established and maintained	80%	Achieved 87,5%	The minimum performance standard of 80% was informed by the baseline number of reports that was registered in the 2018/19 financial year and the uncertainty around the target	None
	Report on review of governance and risk practices produced	Draft SOC Risk Integrity Management Framework Developed	Achieved Draft SOC Risk Integrity Management Framework was developed	None	None

 

6.2.2.1Sub-programme: Financial Assessment and Investment Support

 

Performance outputs to achieve the strategic objectives

 

The sub-programme had three targets for the financial year and all targets were achieved. Details of the progress made are provided in the table below:

 

Sub-programme: Financial Assessment and Investment Support
Strategic objectives	Actual achievement 2018/19	Planned target 2019/20	Actual achievement 2019/20	Deviation from planned target to actual achievement for 2019/20	Comment on deviations
Promote independent financial sustainability of SOCs	27 SOCs’ financial review reports produced	28	Achieved 28	None	None
	7 SOCs’ corporate plans reviewed	7	Achieved 7	None	None
	None	2	Achieved 2	None	None

 

a)Linking performance with budgets

 

Expenditure on the programme amounted to R 36.9 million in the 2019/20 financial year, as compared to R 33. 5 million in the 2018/19 financial year. The spending on goods and services was mainly due to payments made to the State Attorney in respectof litigation matters.

 

 

 

1. Programme 3: Business Enhancement and Industrialisation

 

a) Purpose

To provide sector oversight to enhance the business of SOCs by advancing industrialisation, transformation, intergovernmental relations and international collaboration services; and to support the Shareholder to strategically position and enhance the operations of SOCs and attainment of desired strategic outcomes and objectives by SOCs. The sub-programme in this programme as follows: business enhancement services, energy resources, transport and defence, research and economic modelling.

 

 

b) Performance outputs to achieve the strategic objectives

 

Sub-programme: Business Enhancement and Industrialisation
Strategic objectives	Actual achievement 2018/19	Planned target 2019/20	Actual achievement 2019/20	Deviation from planned target to actual achievement for 2019/20	Comment on deviations
Accelerate development of skills to support the needs of the economy	Four quarterly reports on SOCs’ contribution to the development of scarce and critical skills	Four (4) Quarterly monitoring reports on SOCs’ contribution to the skills development produced	Achieved Four (4) quarterly monitoring reports on SOCs’ contribution to the skills development produced	None	None
Accelerate transformation of the South African economy	Annual Report on CSI strategic and high impact projects implemented	Four (4) quarterly reports on the monitoring of SOCs’ CSI programmes	Achieved Four (4) quarterly reports on the monitoring of SOCs’ CSI programmes Completed	None	None
		Report on social impact assessment of SOCs’ CSI programme produced	Not achieved Report on social impact assessment of SOCs’ CSI programmes not produced	Report was not concluded due to delayed conclusion of the bid evaluation process	The study will be completed in the 2020/21 financial year
Position SOCs to support reindustrialisation of the South African economy	Development of the Industrialisation Strategic Framework	Assessment of SOCs’ quarterly reports on the implementation of the Localisation Strategic Framework	Not achieved Assessment of SOCs’ quarterly reports on the implementation of the Localisation Strategic Framework was not completed	Delay in finalising the quarterly monitoring report	The report will be finalised in the 2020/21 financial year
	None	DPE Africa Strategy Reviewed	Achieved DPE Africa Strategy was reviewed	None	None
	SOC environmental research conducted	DPE EIP produced	Achieved DPE EIP was produced	None	None

 

6.2.3.1Sub-programme: Energy and Resources

 

The sub-programme is responsible for the following SOCs:

 

a) Eskom SOC Limited

Supports the security of supply by:

• Examining Eskom maintenance plans, operational practices, electricity generation and distribution efficiency, and its reserve margin on an ongoing basis.

• Ensuring that Eskom supplies electricity by monitoring, evaluating and engaging Eskom on system security and the new Build Programme to alleviate constraints on an ongoing basis.

• Facilitates engagement between Eskom and other spheres of government to address municipal debt on an ongoing basis.

 

Sub-programme: Energy and Resources
Strategic objectives	Actual achievement 2018/19	Planned target 2019/20	Actual achievement 2019/20	Deviation from planned target to actual achievement for 2019/20	Comment on deviations
Promote commercial viability of SOCs’ operations	Three (3) Shareholder Compacts (2019/20) (Eskom, Alexkor and SAFCOL)	Three (3) Shareholder Compacts (2020/21) signed (Eskom, Alexkor and SAFCOL)	Not achieved 3 Shareholder Compacts not signed	Assumptions relating to some compact targets had to be reviewed as a result of the SOCs’ financial constraints	The 2020/21 Shareholder Compact will be finalised during the 2020/21 financial year
	Review report of Eskom’s generation fleet and life of plants	4	Achieved 4	None	None
	Draft report on Eskom’s future operating model reviewed	4	Achieved 4	None	None
	None	MoA with State Organ/s into the review of the State Forestry Assets Developed	Achieved MoA with State Organs on the review of State Forestry Assets was developed	None	None
	Study on State- Owned Mining Assets to propose an optimum structure completed	4	Not achieved 0	There was a change of approach with regard to the proposed optimal shareholding structure arising from a drastic decline of the company’s financial position	The implementation of the shareholding structure has been deferred to the 2020/21 financial year
Accelerate capital project delivery	Four (4) quarterly assessment reports on the delivery of Eskom’s Build Programme (Medupi & Kusile)	Four (4) Assessment reports on the delivery of Eskom’s Build Programme (Medupi, Kusile and Power Delivery Projects)	Achieved Four (4) Assessment reports on the delivery of Eskom’s Build Programme (Medupi, Kusile and Power Delivery Projects) completed	None	None
	Assessment report on the electricity generation reserve margin to evaluate whether 19% is sustained and produced	Four (4) Assessment reports on the electricity generation reserve margin to evaluate whether 19% is sustained	Achieved Four (4) Assessment reports on the electricity generation reserve margin to evaluate whether 19% is sustained completed	None	None

 

6.2.3.2 Sub-programme: Transport and Defence

 

The sub-programme is responsible for the following SOCs:

• Transnet SOC Limited

• South African Express Airways SOC Limited

• South African Airways SOC Limited

• Denel SOC Limited

 

The sub-programme’s purpose is as follows:

 

• Transnet SOC Limited

 

• Provides oversight on Transnet’s implementation of the Market Demand Strategy (MDS) to optimise the economic impact of infrastructure investment on the economy by monitoring the roll-out of Transnet’s Capital Expenditure Programme quarterly and annually, to assess any significant deviations from corporate plans and potential cost overruns and time delays on major capital projects.

 

• South African Express Airways SOC Limited and South African Airways SOC Limited

 

• Develops a strategic proposal for the optimal group structure of the State owned airlines to assist inrationalising the structures of these airlines as well as to unify their operations.

Facilitates the review of commercial arrangements as and when required to support the financial position of the company and ensure its long-term financial and commercial sustainability.

 

• Denel SOC Limited

 

• Oversees the development of a long-term growth strategy to achieve financial stability and the growth of manufacturing export products on an ongoing basis.

• Leverages off the company’s advances in manufacturing capability through securing work packages in support of the industrialisation drive aligned with the Industrial Policy Action Plan (IPAP) over the medium-term.

• Ensures Denel’s ongoing sustainability by monitoring the implementation of the multi-year turnaround plan over the medium-term.

• Ensures proper balance between the need to develop indigenous capabilities in response to national defence equipment requirements and the need to cooperate and collaborate with international armaments companies in the context of high development costs and the importance of having access to selected markets on an ongoing basis.

 

a) Sub-programme objectives

• To promote commercial viability of SOCs’ operations.

 

b) Performance outputs to achieve the strategic objectives

The sub-programme had six targets for the financial year and three targets were achieved. Details of the progress made are provided in the table below:

 

 

Sub-programme: Energy and Resources
Strategic objectives	Actual achievement 2018/19	Planned target 2019/20	Actual achievement 2019/20	Deviation from planned target to actual achievement for 2019/20	Comment on deviations
Promote commercial viability of SOCs’ operations	Four (4) Shareholder Compacts (2019/20) signed (Transnet, SA Express, SAA and Denel)	Four (4) Shareholder Compacts (2020/21) signed (Transnet, SA Express, SAA and Denel)	Not achieved No Shareholder Compacts (2020/21) (Transnet, SA Express, SAA and Denel) were signed	Transnet Shareholder Compacts were not finalised due to delays in finalising the 2019/20 financial year. Due to financial challenges Denel, SAA and SA Express were not finalised.	None
	Report on implementation of Denel’s Restructuring Plan reviewed	4	Achieved 4	None	None
	Assessed increase in tonnage moved on rail to 235 mtpa by 2019	Assess increase in tonnage moved on rail to 235 mtpa by 2019	Achieved Increase in tonnage moved on rail to 235 mtpa by 2019 assessed	None	None
	Assessed improvement on operational performance of sea ports and inland terminals from 28 to 35 average GCM/H by 2019	Assess improvement on operational performance of sea ports and inland terminals from 28 to 35 average GCM/H by 2019	Achieved Improvement of operational performance of sea ports and inland terminals from 28 to 35 average GCM/H by 2019 was assessed	None	None
	New indicator	Report on implementation of SAA and SA Express Turnaround Plans Completed	Not achieved Report on implementation of SAA and SA Express Turnaround Plans was not completed	Both SAA and SA Express were put under business rescue	None
	Report on implementation of aviation optimal group corporate structure produced	Report on the implementation of the approved optimal corporate structure for the State-owned airlines completed	Not achieved Report on the implementation of the approved optimal Corporate structure for the State-Owned airlines was not completed	Both SAA and SA Express were put under business rescue	None

 

6.2.3.3Sub-programme: Research and Economic Modelling

 

The sub-programme is responsible for the following:

• Economic modelling – Appropriate macroeconomic modelling and research to enhance links between industrial policy, macroeconomic policy and the role of SOCs in economic development. To conduct socioeconomic impact assessment as a result of SOCs’ economic activities.

• Research modelling – conduct topical research to inform the development of policies and strategies.

 

a) Sub-programme purpose

• To conduct cost benefit analysis reviews of proposed business enhancement and transformation initiatives.

• To develop economic sustainability models for proposed work packages and projects.

 

The objective of the Sub-programme is:

 

• To accelerate transformation of the South African economy.

 

b) Performance outputs to achieve the strategic objectives

 

The sub-programme had two targets for the financial year and all targets were achieved. The details of the progress made are provided in the table below:

 

Sub-programme: Research and Economic Modelling
Strategic objectives	Actual achievement 2018/19	Planned target 2019/20	Actual achievement 2019/20	Deviation from planned target to actual achievement for 2019/20	Comment on deviations
Accelerate transformation of the South African economy	One (1) Socio- Economic Impact Assessment of Transnet’s selected capital projects produced	Socio-Economic Impact Assessment Report of Eskom’s selected capital projects completed	Achieved Socio-Economic Impact Assessment Report of Eskom’s selected capital projects completed	None	None
	Two macroeconomic and industry-specific researches conducted	10	Achieved 10	None	None

 

c) Linking performance with budget

 

Expenditure on the programme amounted to R 56.7 billion in the 2019/20 financial year in comparison to R 6.3 billion in the 2018/19 financial year. The significant increase in expenditure was mainly due to disbursement of funds to SOCs, which amounts to R49 billion to assist Eskom with its financial obligations, SA Express – R300 million, SAA – R5.5 billion and Denel – R1.8 billion for working capital and settlement of outstanding debts.

 

1. Concluding Comments on Service Delivery Performance

The sustainability risk remains the following for the department SOC: Unsustainable business model, SOC: Failure of the SOCs to deliver on their Mandates, SOC: Corruption, fraud and maladministration, SOC: Composition of SOC Boards does not provide independence for value chain oversight SOC: Negative turnaround sentiment. The mandate of the department is to provide oversight to the SOCS’s. The department already developed mitigating factors. The Committee will provide oversight over these mitigating factors. Resources such as, human, process and financial remain crucial to the department discharging its mandate.

 

The department has realigned its organisational structure to better execute on its mandate. The changes will drive operational efficiencies to improve the Department’s ability to support its oversight functions of the SOCs. In order to deliver on its mandate, the department needs an overarching legislation to govern SOCs. The role of the policy is to ensure that all governance, financial and operational issues performance are enhanced within the SOCs. The Committee will continue to suggest corrective actions to non-achievement of targets.

 

1. SERVICE DELIVERY AND FINANCIAL ASSESSMENT

The DPE is mandated to perform shareholder oversight on behalf of Government over seven SOCs that play a key role in enabling economic growth, creating jobs and promoting the industrialisation and transformation of the economy. All SOCs are incorporated as companies in accordance with the provisions of the Companies Act (Act 71 of 2008). Except for Denel, all the SOCs are established in terms of their own enabling legislation which sets out the purpose, mandate and objectives for which they were founded. The Department is the administrator and custodian of all legislation in relation to the establishment of SOCs. In terms of section 63(2) of the Public Finance Management Act (PFMA Act 1 of 1999), as amended, the Minister of Public Enterprises has, inter alia, the responsibility of ensuring that the SOCs comply with the PFMA legislation.

 

The Committee observed that due to the supplementary budget the compensation of employees was revised. Further cuts have been made in the goods and services, legal services, consultants, contractors and catering. The Department did not spend the intended budget resulting from prioritizing for the COVID-19 allocations. The department intended to develop the Enterprises Architecture Masterplan.  The department did not meet targets set for the period such as Green Paper of SOE Bill, report on social impact of SOCs CSI impact programmes produced, number of shareholder compacts, report on implementation of Alexkor’s proposed shareholding optimal structure, assessment of SOC’s localization quarterly reports on the implementation, report on implementation of SAA and SA Express turnaround plans, and report on the implementation of the approved optimal Corporate structure for the state-owned airlines. The Committee notes the reasons of non-achievement of targets but still contend that the targets were within the department’s reach. The Committee notes the Shareholder Management Bill has not been completed by the Department this year. The department state that the Presidential State-Owned Enterprises Council (PSEC) has been mandated to develop the overarching Act governing the SOEs as a reason for the deviation. The lack of expertise in quantifying social impact of CSI is a concern. Localisation remains a key policy of government and efforts to localise while industrialising should be maintained. The Committee is in its interactions with SOCs has noted that spend on BBBEE targets has decreased in some SOCs. This is reversing the work that government has already started in reaching economic transformation targets. The inability for SOCs to implement legislative requirements such as the Preferential Procurement Policy Framework Act (PPPFA) is also a concern as this results in local industries being developed. The department should provide oversight and find ways to deal sufficiency with areas of bottlenecks. Efforts to design implementation plans which respond to environmental targets should align to the government’s Carbon Tax Act 2019.

 

 

1. CONCLUDING REMARKS

The department has appointed a permanent Director-General which is a key achievement. The department remains constrained in assessing the performance environment of SOCs. The Department is not aware how much is localised, contributions to CSI and developing a mechanism in which it can track SOC performance environment. The impact of COVID-19 has not been assessed in terms of economic development and growth indicators. This makes it difficult to assess the impact of the pandemic on the labour outcomes of SOCs. The cost of doing business can be enhanced by ensuring that there is available electricity for a growing economy.

 

The policy articulations by the President, Minister of Finance and Minister of Public Enterprises is consistent in ensuring that SOCs’ performance is improved. It has been noted that performance in SOCs is a function of strong boards, good liquidity position and independence of regulators. The gearing levels, interference, attempt to cater for all stakeholder needs and financial dependence on government negatively affect SOCs’ performance. The results of interference and overreach has been evident in cases where boards were compromised, procurement systems weakened, resulting operational inefficiency and financial ruin for most SOCs. Cases related to corrupt activities should be expedited by ensuring that forensic reports are produced and handed over to relevant authorities.

 

The department has a task ahead to implement legislative prescripts, create strategies and implement plans that will unlock the value that will enhance performance in SOCs. The restructuring process called by government to transform the role of SOCs is critical. Whilst ownership questions remain, it is crucial to note that SOCs cannot perform optimally in their current form. The continual bailouts and guarantees are placing the South African economy at risk. A model which will limit government exposure through providing guarantees and financial support to SOCs is currently explored by the Minister of Finance. This will assert the role and mandate of the department as the restructuring process unfolds. The reforms in the energy sector are imminent, therefore we anticipate ease of investment in the energy sector. This will strengthen the role of Eskom and ensure it remain competitive.

 

1. SUMMARY OF REPORTING REQUESTS

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

 

1. RECOMMENDATIONS

 

The Committee recommends that the Minister of Public Enterprises should:

1. Ensure that shareholder compacts are concluded by the third quarter of the year preceding the year covered by the compact.
2. Ensure that the Accounting Officer improves controls and systems to ensure the department achieves an unqualified audit outcome and matters of emphasis from each year must be addressed in the subsequent year.
3. Ensure that SOCs protect jobs in particular highly advanced technical skills to advance the manufacturing capability of the state. SOCs should invest in labour intensive infrastructure programmes to create employment.
4. Ensure that the follows through on cases opened with South African Police Serviceson corruption allegations at Alexkor and that the recommendations of Gobodo Forensic report are implemented.
5. Ensure that the R10.5 billion allocated to SAA is used for the intended purpose, particularly the payment of severance packages and legal obligations.
6. Ensure that the restructuring of Eskom is completed within the set timeframes and maintenance of power stations is done on time. 
7. Outline the impact of the Section 34 Ministerial Determination on Eskom to the Committee on the current generation ability of Eskom.
8. Introduce specific targets for costs containment and revenue “output” generation in the Shareholder Compacts.
9. Review SOC Business Model to enhance sustainability of the companies, which is revenue enhancement and cost containment.
10. Ensure that SOCs invest in Research &Development to improve on innovation and creativity.
11. Align remuneration, performance and consequence management with remuneration guidelines.
12. Ensure the Department of Public Enterprises adhere to the Logical Planning Framework.
13. Enhance and streamline the DPE’s internal processes to ensure rapid response and timeous decision making in the department.
14.  Focus on capacitating core technical functions, develop and enhance technical skills and ensure implementation of sound operational and systems engineering business processes to ensure effective technical oversight.
15. Ensure the implementation of a methodology and manner in which Boards are appointed to ensure independence and enable effective performance review with due consequence management.

 

11CONCLUDING REMARKS

 

The Committee notes the MTEF funding request and the MTBPS funding already given to SAA. The Committee will engage further with the Department of Public Enterprises and the relevant entities in executing its oversight responsibilities.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.