ATC210521: Report of the Portfolio Committee on Public Enterprises on Budget Vote 10: Public Enterprises, and the Annual Performance Plan for 2021/22 of the Department of Public Enterprises, dated 19 May 2021
Report of the Portfolio Committee on Public Enterprises on Budget Vote 10: Public Enterprises, and the Annual Performance Plan for 2021/22 of the Department of Public Enterprises, dated 19 May 2021
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 12 May 2021, 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 implementationtools 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 and reconstruction where needed. The State requires strategic, organizational and operational capacity to play its developmental role. State-owned companies (SOCs) act as the extension of the state’s capabilities in this regard, and act as the implementing agents for execution of projects assigned in line with national priorities.
2. Annual Performance Plan of the Department of Public Enterprises
The Department of Public Enterprises presented an Annual Performance Plan for 2021/22 financial year to the Committee. The Department described the overarching policy and strategic direction and priorities of Government, as articulated by the 2021 State of the Nation Address by the President, the National Development Plan, he Presidential Review Committee on State Owned Enterprises, and other pronouncements of Government on the repositioning and repurposing of the SOCs.
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 (DPE or the Department) undertakes shareholder oversight for Government and is currently instructed by the Executive Authority to oversee strategic State-Owned Companies (SOCs) within its portfolio of seven (7) entities. Currently, the DPE does not have a legislated constitutional mandate. The DPE is recognised as a Government Department through Proclamation No. 82 of 1999. It has an agreed and assigned dual responsibility to:
- Direct and support improvements in the financial, commercial and operational performance of the SOCs and their contribution to the South African economy; and
- Make a positive contribution to the transformation of the South African economy in line with the National Development Plan (NDP) to create a better and sustainable economic environment for all South Africans.
The DPE aims to drive investment, productivity and transformation in the Department’s portfolio of state-owned companies (SOC), their customers and suppliers to unlock growth, drive industrialisation, create jobs and develop skills. The Department’s portfolio has seven state-owned companies, namely Alexkor, Denel, Eskom, South African Forestry Company (SAFCOL), South African Airways (SAA), South African Express Airways (SAX), and Transnet.
The vision of the Department is to create an enabling environment in which SOCs add real economic value by focussing on operational excellence, commercial viability and fiscal prudence. This will drive developmental objectives, industrialisation, job creation and skills development.
The mission of the Department is to provide clear strategic direction and oversight to the Department’s SOCs, seeking to ensure that the SOCs:
- Are financially sustainable, adequately funded and operationally robust;
- Have operating models that keep pace with global development and innovation;
- Provide reliable, high-quality and cost-effective services and infrastructure to industry and our citizens;
- Secure investment and funding for strategic industrial development; and
- Align with national developmental objectives.
The Department’s overall mandate is to ensure that the SOC within its portfolio are directed to serve Government’s strategic objectives as outlined in the NDP and other policies of sector policy departments. The Department does not directly execute programmes but seeks to leverage the state ownership in the economy to support the delivery of key outcomes outlined in the NDP and the Medium Term Strategic Framework (MTSF).
The expansion of rail capacity, productivity improvements at the ports and the delivery of the current build programme are key deliverables that have been highlighted in the MTSF.
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 infrastructure development and 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 financial challenges, due to not only operational inadequaciesand 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.
In executing this function, the department has identified three programmes in its Annual Performance Plan (APP) which are the following: Administration and Corporate Management, SOCs Governance Assurance and Performance, and Business Enhancement and Industrialisation.
The Administration and Corporate Management programme has prioritised one outcome, namely,strengthen the governance system of SOCs and promote institutional alignment in the execution of the oversight function.
The SOC Governance Assurance and Performance in 2021/22 has identified the following outcomes; strengthen the governance system of SOCs and promote institutional alignment in the execution of oversight function, and improved governance and accountability. The indicators include annual assessment of independent board performance evaluation framework, development and implementation of SOCs Risk Integrity management framework, Government Shareholder Management Bill adopted into law by 2023 and review previously undertaken forensic audits and ensure recommendations are implemented including (State Capture Commission). The sub programme on financial assessment and investment support has an outcome on improved financial sustainability of SOCs with the following outputs: outlook on SOC financial position, alignment of SOC plans to key priorities outlined in SIS and SHC, monitor the implementation of SOCs external auditor’s audit findings and payment of SOCs proportion of earnings.
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), economic transformation and job creation, position SOCs to support the reindustrialisation of the SA economy and position.
The outputs for this programme includes; increase percentage spend on locally manufactured goods and services, improved SOCs contribution to the transformation agenda, socio-economic development of SOCs, improved spend on enterprise development a minimum % of leviable amount (excluding statutory skills development) on essential skills development, adaptation to climate change impact, monitor implementation of SOCs climate change response and plans to reduce emissions and increase resilience to climate change impact.
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 in February 2021:
- Government priorities for 2021:
- Defeat the coronavirus pandemic.
- Accelerate economic recovery.
- Implement economic reforms to create sustainable jobs and drive inclusive growth.
- Fighting corruption and strengthen the State.
- Since the launch of the plan, Government has focused on four priority interventions:
- a massive rollout of infrastructure throughout the country,
- a massive increase in local production,
- an employment stimulus to create jobs and support livelihoods, and
- the rapid expansion of our energy generation capacity.
- The fourth priority intervention of the Economic Reconstruction and Recovery Plan is to rapidly expand energy generation capacity.
- Restoring Eskom to operational and financial health and accelerating its restructuring process is central to this objective.
- Eskom has been restructured into three separate entities for generation, transmission and distribution. This will lay the foundations for an efficient, modern and competitive energy system.
- Eskom is making substantial progress with its intensive maintenance and operational excellence programmes to improve the reliability of its coal fleet.
- Government is working closely with Eskom on proposals to improve its financial position, manage its debt and reduce its dependence on the fiscus. This requires a review of the tariff path to ensure that it reflects all reasonable costs and measures to resolve the problem of municipal debt.
- In December 2020, government and its social partners signed the historic Eskom Social Compact, which outlines the necessary actions we must take, collectively and as individual constituencies, to meet the country’s energy needs now and into the future.
- Over the last year, we have taken action to urgently and substantially increase generation capacity in addition to what Eskom generates:
- The Department of Mineral Resources and Energy will soon be announcing the successful bids for 2 000 megawatts (MW) of emergency power.
- The necessary regulations have been amended and the requirements clarified for municipalities to buy power from independent power producers. Systems are being put in place to support qualifying municipalities.
- Government will soon be initiating the procurement of an additional 11 800 MW of power from renewable energy, natural gas, battery storage and coal in line with the Integrated Resource Plan 2019.
- Despite this work, Eskom estimates that, without additional capacity, there will be an electricity supply shortfall of between 4 000 and 6 000 MW over the next five years, as old coal-fired power stations reach their end of life.As part of the measures to address this shortfall, we will in the coming weeks issue a request for proposals for 2 600 MW from wind and solar energy as part of Bid Window 5. This will be followed by another bid window in August 2021.
- Recent analysis suggests that easing the licensing requirements for new embedded generation projects could unlock up to 5 000 MW of additional capacity and help to ease the impact of load shedding. Government will therefore amend Schedule 2 of the Electricity Regulation Act, 2006 (Act 4 of 2006) within the next three months to increase the licensing threshold for embedded generation.This will include consultation among key stakeholders on the level at which the new threshold should be set and the finalisation of the necessary enabling frameworks.Eskom has already started work to expedite its commercial and technical processes to allow this additional capacity onto the grid without undue delay.
- As governmentmobilises all of the resources at its disposal to support economic recovery, it cannot lose sight of the threat that climate change poses to our environmental health, socio-economic development and economic growth. Government is, therefore, working to fulfil its commitments under the United Nations Framework Convention on Climate Change and its Paris Agreement which include the reduction of greenhouse gas emissions.
- Eskom, is largest greenhouse gas emitter, has committed in principle to net zero emission by 2050 and to increase its renewable capacity.
- Eskom will be looking to partner with investors to repurpose and repower part of its coal fleet. This will be done in a way that stimulates investment, local economic activity and local manufacturing, as part of a just transition.
- Government work on climate change will be guided by the Presidential Coordinating Commission on Climate Change, which is meeting for the first time this month. The commission will work on a plan for a just transition to a low-carbon economy and climate resilient society.
The priorities for the Department for the Medium Term Expenditure Framework period are the following:
a) Oversight model: Develop an enhanced and internationally benchmarked SOC oversight model.
b) Private Sector Participation: Mobilise the private sector to stimulate capital investment.
c) Research-based Restructuring of SOCs: DPE research capacity needs to be improved to attain the goal of developing world class SOCs.
d) Restructuring office: The restructuring of SOCs require skills not found in the public sector. This office will then be staffed by professionals sourced through partnerships with the private sector either through sourcing contracts or through initiatives such as Thuma Mina.
e) Innovative Funding Solutions: Development of strategies on management of existing capital and attraction of new capital to fund the enormous infrastructure and industrial development effort required of Government.
f) SOC Leadership model: Development of dedicated leadership development programmes.
g) Corruption and Malfeasance: An internal unit will be established to ensure that historical malfeasance is correctly addressed.
h) Performance tracking solution: In order to obtain reliable and immediate data on performance on SOCs, the DPE will ensure that enabling infrastructure is developed.
i) Innovative Empowerment and Community Development Solutions: The SOCs’ approach to Corporate Social Investment (CSI) and empowerment needs to be reviewed and aligned with the developmental needs of communities and comply with environmental regulations.
j) Localisation and Industrialisation: The buying power of the SOCs will be used to ensure the various procurement leverage programmes of government are utilised to ensure localisation of critical industrial capabilities.
3. Programmes of the Department
3.1 Programme 1: Administration and Corporate Management
The purpose of this programme is to provide strategic management and support services to the Department.
The programme includes the Office of the Director-General/Management. The programme is currently made up of the following sub-programmes: Management; Security and Facilities Management; Information Management and Technology; Office of the Chief Financial Officer; Human Resources; Communications; Strategic Management; and Internal Audit.
The Department’s core functions require significant administrative support, and a substantial portion of the budget is in the Administration programme, an amount of R159.8 million for 2021/22, which has cross-cutting sub-programmes providing for intergovernmental and international relations, strategic planning, monitoring and evaluation, and communications. The majority of the budget, R88.9 million, is for compensation of employees, while R67.3 million is for goods and services. The balance of R3.7 million is for machinery and equipment.
The spending focus over the medium term will be on supporting the Department to play its oversight role on SOCs by providing administrative support services to the Department. 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 programme has four output indicators for the year, relating to skills development, the Human Resources Plan, implementation of the Architecture Masterplan and the Stakeholder Engagements Plan.
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 12.1 per cent from R142.5 million in 2020/21 to R159.8 million in 2021/22. Expenditure on compensation of employees constitutes 58.2 per cent over the medium term. Over the medium term, expenditure on compensation of employees declines by 0.8 per cent from R92.3 million in 2020/21 to R90.2 million in 2023/24. The number of personnel is expected to increase from 98 employees to 117 employees over the medium term.
Spending on consultants is expected to increase by 485 per cent from R2 million in 2020/21 to R11.7 million in 2021/22 and increase by 59 percent over the medium term and constitutes 4.8 per cent of the budget over the medium term.These allocations are mainly towards procurement of legal representation due to a large increase in the number of cases that the Minister are cited due to the challenges faced by the SOCs.The legal budget of the Ministry is managed in this program.
Goods and services increase by 44.7 per cent from R46.5 million in 2020/21 to R67.3 million in 2021/22, and constitutes39.4 per cent of the programme budget over the medium term. Travel and subsistence constitute 17.2 per cent of the Goods and services budget for 2021/22, and increases by 6.1 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 and enforce SOCs’ governance, legal assurance, financial and non-financial performance monitoring, evaluation and reporting systems, in support of the Shareholder, and to ensure alignment with Government’s priorities.
Over the medium term, the programme will ensure the effective shareholder oversight of state owned companies by:
• Providing governance and legal systems;
• Developing and maintaining shareholder risk profiles and mitigating strategies; and
• Monitoring, evaluating and reporting on the financial and non-financial performance, and proposing intervention measures when required.
The programme has the smallest budget of the three programmes of the Department, amounting to R61.7 million for the 2021/22 financial year. The majority of the budget goes to compensation of employees, with the balance going to goods and services.
The Sub-programmes include:
The Management sub-programme comprises the office of the Deputy Director General, which provides strategic leadership and management of the programme personnel.
The sub-programme Legal provides external legal services and oversight support to sector teams. This entails providing legal services, including transaction and contract management support to the Department, as well as work specifically related to sector teams’ oversight of commercial activities of state-owned companies within their portfolios.
The sub-programme Governance develops, monitors and advises on legislative, corporate governance and shareholder management systems for the Department and its portfolio of state-owned companies. Risk and compliance management is a component of this unit, which is responsible for developing and implementing risk and compliance with laws and regulations.
Sub-programme 2: Governance, legal assurance, risk profiling and mitigation has 4 performance targets. The sub-programme will oversee board performance, the development of the policy for shareholder management and the implementation of the SOC Risk and Integrity Management Framework (RIMF).
Financial Assessment and Investment Support analyses SOCs’ capital plans, operational performances, execution of capital programmes and proposed restructuring proposals; and advises on appropriate action. The sub-programme has four performance targets for the year. The sub-programme will review SOC quarterly financials and corporate plans, and monitor SOCs implementation of audit findings.
The budget for the programme increases by 35.6 per cent from R45.5 million in 2020/21 to R61.7 million in 2021/22. Over the medium term, 56.8 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 31 employees in 2020/21 to 35 employees over the medium term.
Compensation of employees decreases by 2.9 per cent from R34.8 million in 2020/21 to R33.8 million in 2021/22. Goods and services increase by 160.7 per cent from R10.7 million in 2020/21 to R27.9 million in 2021/22, and increases by 46.8 per cent over the medium term. Expenditure on consultants is expected to increase by 53.5 per cent over the medium term from R6.0 million in 2020/21 to R21.9 million in 2023/24. Legal services increase by 31.5 per cent over the medium term, while travel and subsistence increased by 57.2 per cent from R1.2 million in 2020/21 to
R4.5 million in 2023/24. The legal costs of the Department are managed in this programme.
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.
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; and
• 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 budget for the programme amounts to R36.3 billion for the 2021/22 financial year, mostly due to R36 billion appropriated for the payment for financial assets. Eskom is toreceive R31.7 billion to provide financial support to assist with their debt-service obligations, while R4.3 billion for SAA for the repayment of government guaranteed debt.
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. It will also maintain a register of commitments made by SOCs and also proposesfor development the implementation of special programmes focusing on skills development, transformation and the youth in partnership with sector and policy departments, SOCs, and other stakeholders including development agencies.
The sub-programme has seven performance indicators for the year. The sub-programme will monitor SOC spend on local content, preferential procurement and compliance with Broad-Based Black Economic Empowerment (B-BBEE), CSI spend, enterprise development contributions, and produce a report on SOC Climate Change Response initiatives.
The sub-programme Energy Resources exercises shareholder oversight over Eskom, Alexkor and the South African Forestry Company (SAFCOL). The sub-programme has seven performance targets for the year. The Department will continue to monitor SAFCOL’s Timbadola re-investment project, Alexkor’s optimal operating structure, Eskom’s infrastructure programme, performance of its generation fleet and implementation of the Eskom Road Map for reformed electricity supply industry.
The sub-programmeTransport and Defenceexercises shareholder oversight over Transnet, South African Airways, South African Express Airways and Denel. The sub-programme has six performance indicators related to the above mentioned entities. The sub-programme will monitor Denel’s performance against client-agreed milestones on significant contracts. With regards to Transnet, the Department will monitor the entity’s investment programme in rolling stock and rail infrastructure, implementation of the separation of Transnet National Ports Authority (TNPA), port equipment reliability and implementation of the corridor strategy. There is not performance indicator relating to the performance of SAA.
The sub-programmeResearch 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 sub-programme has 3 performance indicators for the year. The Department will develop a “Just” Energy Transition Framework in collaboration with Eskom, review the Global, Regional and Local Economic report and conduct two industry-specific research for the year to inform policy decision-making. The sub-programme’s budget decreases in nominal terms by 27.6 per cent from R23.9 million in 2020/21 to R30.5 million in 2021/22.
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 decreases by 42.6 per cent from R58.0 million in 2020/21 to R33.3 million in 2021/22. Personnel in the programme is projected to increase from 51 employees in 2020/21 to 54 employees over the medium term. Goods and services is projected to decrease by 22.6 per cent from R19.5 million in 2020/21 to R15.1 million in 2021/22. Consultants will decrease by 47.0 per from R16.8 million in 2020/21 to R8.9 million in 2021/22.
Payments for financial assets constitutes 99.8 per cent of the programmes budget. Payments for financial assets decreases by 53.5 per cent from R77.4 billion in 2020/21 to R36.0 billion in 2021/22. Eskom will receive an additional R31.7 billion in 2021/22 in addition to the allocations of R49 billion in 2019/20 and R56 billion in the 2020/21 financial year. Over the medium term period, South African Airways has been allocated an amount of R6.1 billion (R4.3 billion in 2021/22, and R1.8 billion in 2022/23) for the repayment of government guaranteed debt. 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. No further allocations will be made to the SOCs over the medium term.
Over the medium term the Department will continue to focus on enhancing reforms to stabilise SOCs, and strengthening its oversight capacity to ensure that the SOCs in its portfolio are sustainable and contribute 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 2021 medium term
Nominal Rand change
Real Rand change
Nominal % change
Real % change
Programme 1: Administration
12,14 per cent
7,62 per cent
Programme 2: SOC Governance Assurance and Performance
35,60 per cent
30,14 per cent
Programme 3: Business Enhancement, Transformation and Industrialisation
-53,41 per cent
-55,29 per cent
-53,24 per cent
-55,12 per cent
Source: National Treasury (2021)
Table 1 describes the changes in allocations from the years 2020/21 and 2021/22, and the outer years of the MTEF. From this, the following can be concluded:
- Programme 1: Administration, has a nominal increase of 12.14 per cent in 2021/222, with a real increase of 7.62 per cent. Programme 1 accounts for the second largest allocation of the Department’s overall budget in 2021/22.
- Programme 2: State-Owned Companies Governance Assurance and Performance receive the smallest allocation in 2021/22. The programme increases by 35.60 per cent nominally in 2021/22 or in real terms by 30.14 per cent.
- Programme 3: Business Enhancement, Transformation and Industrialisation accounts for the largest allocation of the budget, due to transfers to SOCs under Payments for financial payments. Programme 3 allocations has decreased by 53.41 per cent due to the inflated 2020/21 budget of the substantial allocations made to Eskom and South African Airways for the settlement of government guaranteed debt and the implementation of SAAs business rescue plan.
Overall, the Department’s budget decreases by 53.24 per cent in nominal terms from
R77.607 billion in 2020/21 to R36.291 billion in 2021/22.
Compensation of employees amounts to R176.0 million for 2021/22, a decrease of 5.0 per cent on R185.2 million in 2020/21. Goods and services amounts to R110.2 million in 2021/22, an increase of 43.7 per cent on R76.7 million in 2020/21. Of the goods and services budget, the use of consultants constitutes 34.4 per cent while travel and subsistence accounts for 27.9 per cent of the budget for 2021/22. Compensation of employees is set to decrease at an average annual rate of 0.9 per cent, from R185.2 million in 2020/21 to R180.0 million in 2023/24, which constitutes the Department’s largest administrative cost driver. Travel and subsistence increases from R5.4 million in 2020/21 to R22.0 million in 2023/24; while consultants increases from R24.8 million in 2020/21 to R38.0 million in 2023/24.
4.1 Report of Auditor-General on the Annual Performance Planof the Department of Public Enterprises for 2021/22financial 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 established in terms of the Alexkor Limited Act (1992) to mine marine and land diamonds in Alexander Bay, Northern Cape. Over the medium term, the company will focus on normalising operations in the wake of the COVID‐19 pandemic.
The AlexkorRichtersveld Mining Company Pooling and Sharing Joint Venture, in which Alexkor holds 51 per cent share, continues to face operational and financial challenges. These include a lack of adequate funds to undertake exploration activities and deteriorating weather conditions. The joint venture generated revenue of R334 million in 2019/20, a 20 per cent decrease from the previous year. This was due to a decrease in caratproduction, from 68 000 carats in 2018/19 to 28 700 carats in 2019/20.
While the Alexkor group generated revenue of R170 million in 2019/20, it reported a loss of R99 million. As such, the company is dependent on financing to settle operating expenses, which is not sustainable and exposes it tothe risk of liquidation. The department’s immediate focus is to restore the joint venture’s sustainability in diamond operations through aggressive reduction in the cost base and the repositioning of the business.
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.
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.
The company commenced with its restructuring process in 2019/20 and is in the process of identifying strategic equity partners. In 2020/21, the company was given approval to dispose of shares it held in HensoldtOptronics and LMT Products, a subsidiary of LMT Holdings. Part of the restructuring process over the MTEF period will involve reducing the company’s number of personnel. In 2019/20, Denel generated R2.7 billion in revenue, R700 million less than the previous year, translating to an unaudited loss of R1.8 billion in 2019/20 compared to a loss of R1.7 billion in 2018/19. This was mainly drivenby poor programme management and liquidity challenges that constrained operations and affected sales.
However, restructuring and cost‐saving initiatives that are already in place, as well as recapitalised allocationsfrom government (R1.8 billion in 2019/20 and R576 million in 2020/21) are expected to stimulate revenuegeneration.
Eskom is governed by the Eskom Conversion Act (2001) and is mandated to generate, transmit and distribute electricity to industrial, mining, commercial, agricultural and residential customers and redistributors.
In response to the company’s persistent financial, operational and structural challenges, in 2019 it was announced that Eskom will be unbundled into 3 subsidiaries (generation, transmission and distribution) under a holding company, Eskom Holdings. This announcement led to the drafting and adoption of the 2019 roadmap for Eskom in a reformed electricity supply industry. The roadmap outlines actions to overcome challenges, defines key steps in transforming the electricity supply system, addresses steps to restore the company’s finances, identifies measures to reduce the company’s cost structure, and details the restructuring process.
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 set out in the 9‐point plan to improve generation, which are short‐term, medium‐term and long‐term in nature. These interventions primarily involve repairing new plant defects, improving energy availability by reducing trips and full load losses, accelerating the return of serviced units on long‐term forced outages, repairing partial load losses and boiler tube leaks, rebuilding coal stockpiles, increasing diesel stocks, and recruiting critical staff for the generation division.Eskom’s revenue increased from R179.8 billion in 2018/19 to R199.4 billion in 2019/20. The company’s loss for the year decreased slightly, from R20.9 billion in 2018/19 to R20.5 billion in 2019/20. The loss is mainly due to high primary energy costs and finance costs. The company’s financial position remains weak and it is not able to generate sufficient cash from operations to cover debt obligations when they become due. As a result, government has committed to provide financial support to assist with the company’s debt‐service obligations. Thus far, R49 billion in 2019/20 and R56 billion in 2020/21 have been provided, with a further R31.7 billion allocated in 2021/22.
5.4 South African Airways
South African Airways has emerged out of business rescue process, which it went on 05 December 2019. The business operations are to provide 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 August 2020, the business rescue practitioners published the approved business rescue plan. To implement the plan, R10.5 billion was allocated in the 2020 second adjustments budget. Over the medium term, the focus will be on operationalising the restructured airline to enable interconnectivity within South Africa and the Southern African Development Community, including the expansion of regional air services capability.
An amount of R6.1 billion (R4.3 billion in 2021/22 and R1.8 billion in 2022/23) is allocated to the airline for the repayment of government guaranteed debt. Unaudited financial statements reflect that the airline generated revenue of R24.1 billion in 2019/20. The unaudited net loss for the same year is R5.5 billion. Implementation of the business rescue plan is expected toimprove this position.
5.5 South African Express Airways
South African Express Airways is in liquidation due to operational and financial challenges over a number ofyears and despite financial support from government, the airline was unable to resolve these challenges. The airline was placed under business rescue in February 2020 but was unable to restructure, leading to it being placed under provisional liquidation in April 2020. By October 2020, an interested buyer had been identified however the identified party could not come up with the acquisition funding. This process is expected to be concluded by the end of 2020/21.
5.6 South African Forestry Company
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. Between 2017/18 and 2019/20, the company reported losses due to operational and accounting inefficiencies. Operating costs are higher than revenue, which requires the implementation of stringent cost-containment initiatives. In 2019/20, the company recorded an unaudited loss of R47 million. To recuperate some losses and stimulate revenue generation, over the MTEF period, the company will continue with the Timbadola reinvestment project, progress on which is monitored by the department on a monthly basis.
Transnet provides and operates freight transportation services and infrastructure. The company’s current operating model is geared towards lowering the cost of doing business in South Africa. To sustain and expand its capacity, over the 5‐year period ending 2024/25, Transnet plans to invest R127.7 billion, of which 75.7 per cent (R96.7 billion) will be spent on sustaining capital, particularly in rail, port and pipeline infrastructure, across its operating divisions as per its 2020 corporate plan.
The department continues to investigate viable options to corporatise the National Ports Authority, as required by the National Ports Act (2005). Initial studies have indicated adverse ramifications for the South African economy and the company’s operating divisions. As a result, the department will continue to investigate possible options without compromising the economic competitiveness of South Africa’s transport sector.
In 2019/20, the company spent R18.5 billion on capital projects, bringing its total investment over the past 8 years to R202 billion. Revenue increased from R74.1 billion in 2018/19 to R75.3 billion in 2019/20, mainly due to a weighted average tariff increase of 2.9 per cent across operating divisions. Net profit decreased from R6 billion in 2018/19 to R3.9 billion in 2019/20. The Ports Regulator of South Africa has indicated that no tariff increase will be granted to the National Ports Authority in 2021/22, which is likely to have a negative impact on the company’s overall revenue for the year.
6. Committee Observations
6.1 The Committee made the following observations:
6.1.1 The Committee welcomed the strategic plan and annual performance plan of the department, but noted with concern the constrained budget of the department to effectively exercise oversight over state-owned companies.
6.1.2 The Committee noted with concern that the Shareholder Management Bill did not feature as a deliverable in 2021/22 financial year, and the absence of such an overaching legislation continues to weaken the ability of the state to direct SOCs in advancing the developmental objectives of government.
6.1.3 The Committee expressed concern that there are still no remuneration standards for executives and boards of state-owned companies.
6.1.4 The Committee noted with concern the lack of favourable legislative and policy environment to enable SOCs to operate efficiently and be competitive in the market.
6.1.5 The Committee expressed concern regarding the ageing infrastructure and the lack of investment in capital equipment and machinery in most state-owned companies, which has affected the productivity of the companies.
6.1.6 The Committee expressed concern over lack of transformation and lack of effort in ensuring that there is improved percentage of local content in goods and services purchased by SOCs.
6.1.7 The Committee noted that whilst there is progress in the appointment of female executives, there is still more that need to be done with regards to empowerment of youth, women and people living with disabilities.
6.1.8 The Committee expressed concern that in some entities such as Denel, there is still a plight of unpaid workers due to financial challenges facing the company.
6.1.9 The Committee has welcomed the call to restructure SOCs by the Department which will focus on Eskom, Transnet, Denel and SAA.
6.1.10 The Committee noted that energy security remains critical for socio-economic growth and will further monitor the restructuring of Eskom into three subsidiaries –Generation, Transmission and Distribution as planned.
6.1.11 The Committee noted the initiatives by Transnet Port Terminals (TPT) – Cape Town, Richards Bay and Durban to improve efficiencies and drive transformation in ports operations.
6.1.12 The Committee noted the conclusion of the business rescue process at SAA and welcomed the appointment of the Chief Executive Officer for South African Airways, and wished him well in ensuring South Africans have a fit for purpose national airline.
6.1.13 The Committee noted with concern that the recoveries of monies, assets and intellectual properties from SOCs during the state capture has been slow.
6.1.14 The Committee welcomed efforts of the Department of Public Enterprises to start SOE Integrity Risk Unit which will review forensic reports and follow up on Special Investigative Unit (SIU) in pursuing those implicated in corruption and looting the SOCs.
The Committee recommended that the Minister of Public Enterprises should, within the 2021/22 financial year, ensure that the Department of Public Enterprises:
7.1 report to the Committee on the establishment and operationalization of the Presidential SOE Coordinating Council, including the work the council will be conducting in the implementation of the recommendations of the 2014 report by the Presidential Review Commission on SOEs.
7.2 consider introducing a comprehensive plan to expand the corporate social investment of SOCs to rural parts of the country.
7.3 develop 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 consider working with the Department of Trade and Industry and National Treasury in addressing localization strategies. These should include resetting of trade and investment cooperation to stimulate and support small businesses and employment initiatives, reduce barriers to trade in services (which are often labor-intensive) and investments in industrial value chains.
7.5 prioritisethe development of programmes with SOCs aimed at equipping young people with appropriate skills for the economy to address youth unemployment.
7.6 provide the Committee with shareholder compacts on an annual basis and quarterly reports on how the companies are performing in achieving targets.
7.7 ensure 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 ensure 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 ensure competent executive and board appointments at SOCs through conducting security clearances, integrity checks, and lifestyle audits.
7.10 collaborate with the Department of Rural Development and Land Reform, in addressing long outstanding issues relating to Safcol land claims and present regular progress reports (twice a year) to the Committee.
7.11 ensure that issues relating to the going concern of South African Airways and South African Express Airways are resolved.
7.12 develop a state aviation strategy that will enable the sustainability of the national carrier with the Department of Transport.
7.13 work with the Departments of Cooperative Governance and Traditional Affairs, 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.
7.14 address the financial and governance issues facing the state-owned companies within the Department’s portfolio and provide regular feedback to the Committee.
7.15 work 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.
7.16 ensure that all vacant positions are permanently filled within the Department of Public Enterprises by the end of the financial year.
7.17 develop post COVID-19 strategies, plans and actions and include them in its budget, plans and SOC shareholder compacts.
7.18 present to the Committee the corporatisation of the Transnet National Port Authority (TNPA).
7.19 report every second quarter to the Committee on progress being made.
Having considered the Budget Vote and the Annual Performance Plan of the Department of Public Enterprises, the Committee recommends that the House passes the budget.
Report to be considered.
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