ATC080611: Report on Department’s Budget Hearings
Public Enterprises
REPORT OF THE PORTFOLIO COMMITTEE ON PUBLIC ENTERPRISES ON THE BUDGET HEARINGS OF THE DEPARTMENT OF PUBLIC ENTERPRISES 2008/2009, DATED 11 JUNE 2008.
The Department of Public Enterprises presented its budget to the Portfolio Committee on Public Enterprises on 27 and 28 February 2008.
The Department of Public Enterprises’ mandate is to provide shareholder management of the nine State-Owned Enterprises (SOEs) – Alexkor, Broadband Infraco, Denel, Eskom, Pebble Bed Modular Reactor (PBMR), South African Forestry Company Ltd (SAFCOL), South African Airways (SAA), South African Express Airways (SAX) and Transnet – with the aim of achieving economic growth and efficiency in strategically important economic sectors, including transport, energy and communications.[1] The department of Public Enterprises is essentially an oversight and coordinating Department which acts on behalf of the state in its capacity as a shareholder of the various state owned enterprises. In essence the mandate of the Department is to ensure alignment of the SOE business strategies with the Sector department policies and regulatory authorities while ensuring that SOEs are sustainable businesses that provide economic benefit to the country.
In order to fulfill its mandate, the Department envisages SOEs that:
are efficiently managed and meet domestic and international industry operational benchmarks;
play a role in the industry in which they operate that ensures an optimal allocation of responsibilities between the public and private sector;
undertake investment programmes with a “reserve margin” to accommodate faster economic growth; and
leverage their investment programmes to the benefit of the South African and African economies on a sustainable basis.[2]
Linked to its vision is the Department’s mission to:
provide SOEs with clear mandates;
provide consistent and strategic performance management of SOEs; and
provide simple and unambiguous governance systems.[3]
endeavours to systematically leverage SOEs’ investment in infrastructure to ensure maximum benefit to the South African economy.
The current priorities of the Department are to monitor and plan, delivery and financing of the infrastructure expansion programmes of Eskom and Transnet, the turnaround programmes of Denel and SAA, the establishment of Broadband INFRACO, the growth strategies of Alexkor, and the design and development programme of the PBMR.[4] The Department has a pivotal role in monitoring, evaluating and facilitating Eskom’s response to the difficulties with the electricity supply.
The total budget allocated to the Department is R3, 007 862 billion and transfers to State Owned Enterprises (SOEs) amount to R2, 842 billion. Pebble Bed Modular Reactor accounts for R 1, 750 billion of the transfer payments. Transfers will also be made to Alexkor (R130 million), South African Express (R585 million) and Broadband INFRACO (R377 million). Over the Medium Term Expenditure Framework (MTEF) period (2007-2011) transfers to the SOEs will total R9.5 billion, of which a total of R1.4 billion made up of R933 million to Denel in 2007/08 and R481 million to SAX in 2008/09 is of a capital nature.
During the hearings the Committee engaged each of the various departmental components including the office of the DG and the CFO. What follows is a synopsis of individual presentations.
Administration
The programme is responsible for the overall direction and management of the Ministry and the Department and the provision of administrative support services to the Department. The priorities of the programme for 2008/09 are the following:
process automation;
training and development;
performance management of staff;
annual risk assessment and audits of DPE; and
energy efficiency campaign throughout DPE offices.[5]
The breakdown of the budget on priority areas is as follows:
|
ITEMS R thousand |
BUDGET 07/08 (R000) |
BUDGET 08/09 |
|
COMPENSATION OF EMPLOYEES |
29 014 |
33 979 |
|
GOODS AND SERVICES |
31 629 |
30 982 |
|
TRANSFERS (Sponsorships, donations and 16 days of activism) |
620 |
650 |
|
CAPITAL |
1 432 |
375 |
|
Sub-Total: Operational |
62 075 |
65 336 |
|
TOTAL |
62 695 |
|
The transfers increased from R620 thousand in 2007/08 to R650 thousand in 2008/09. There was no significant change in the programme except for an increase in compensation of employees. Equipment contracts, telephones, stationery, training, recruitment advertising and software licences are located in this program under item “Goods and Services”.
Legal, Governance, Risk and Transactions (LGRT)
The purpose of the programme is to provide effective legal services, corporate governance and risk management systems and the implementation of legal aspects of strategically important transactions.
The priorities of the programme for 2008/09 are:
South African Government Shareholder Management Legislation;
Alexkor Deed of Settlement implementation;
Aventura closure;
KLF disposal;
SOE and Shareholder Risk Assessments;
General legal counsel for the Department; and
Provision of legal support for Shareholder transactions.[6]
The breakdown of the budget on priority areas and planned activities is as follows:
|
ITEMS R thousand |
BUDGET 07/08 (R000) |
BUDGET 08/09 (R000) |
|
COMPENSATION OF EMPLOYEES |
13 954 |
13 550 |
|
GOODS AND SERVICES |
10 108 |
14 613 |
|
TRANSFERS (Alexkor) |
73 000 |
130 000 |
|
CAPITAL |
16 |
- |
|
Sub-Total: Operational |
24 078 |
28 163 |
|
|
97 078 |
158 163 |
Transfers to Alexkor increased from R73 million in 2007/08 to R130 million in 2008/09. Operational expenditure increased in 2008/09 due to additional payments of legal costs for Alexkor and SAFCOL transactions.
Joint Project Facility (JPF)
The purpose of the programme is to identify synergies and co-ordinate and develop cross-cutting projects that leverage the assets, activities and capabilities of the SOE to the benefit of the SOE and the economy as a whole. The priorities of the programme for 2008/09 are:
Aerospace: Strategy formulation;
Rest of Africa- implementation of supplier benchmarking; and Joint infrastructure development programme with 2 countries;
Autumn school 2008 roll-out;
Competitive Supplier Development Programme (CSDP): finalise Eskom, Transnet, PBMR supplier development plans;
Environmental Issues: Finalise guidelines for Strategic Important Developments (SIDs);
Advanced Learning Programme: Module development;
Human Resources & Capacity Building: Establishment of the Employment & Skills Development Agency (ESDA);
Property: guide non-core property disposals; and
SA Power Project: strategy for a globally competitive power cluster to support the build programme.[7]
The JPF endeavors to identify synergies to develop cross-cutting projects that leverage the assets, activities and capabilities of the various SOEs to the benefit of the entities themselves as well as the South African economy. The aim is to positively influence not only the South African economy but that ofAfrica as a whole.
The breakdown of the budget on priority areas and planned activities is as follows:
|
ITEMS R thousand |
BUDGET 07/08 |
BUDGET 08/09 |
|
COMPENSATION OF EMPLOYEES |
2 315 |
5 017 |
|
GOODS AND SERVICES |
12 053 |
23 806 |
|
TOTAL |
14 368 |
28 823 |
The expenditure increase is meant to meet the objectives of the unit, which include the commencement of the SA Power Project and the implementation of the Competitive Supplier Development Programme in 2008/09. The Power Project will leverage the Eskom build programme to enhance the country’s manufacturing industry, technology and skills base. Sub-programmes under this programme include the Competitive Supplier Development Programme.
Energy and Broadband Enterprises (EBE)
The purpose of the programme is to align the corporate strategies of Eskom, PBMR and Broadband INFRACO with government’s strategic intent and monitor their performance in respect of financial and operational matters.
The priorities of the programme for 2008/09 are:
Portfolio Management;
Implementation of the National Electricity Emergence Response Plan;
Fast track Geyser Replacement Programme;
Capacity Expansion Programme implementation (Generation & Transmission);
Implementation of Single Buyer Model – monitor Co-generation and IPP implementation;
Generation, Transmission & Distribution Infrastructure Maintenance & Refurbishment;
Monitoring of Eskom Nuclear Build Programme; and
Monitoring of progress of International Submarine Cable rollout.[8]
The breakdown of the budget on priority areas is as follows:
|
ITEMS R thousand |
BUDGET 07/08 |
BUDGET 08/09 |
|
COMPENSATION OF EMPLOYEES |
6 474 |
6 915 |
|
GOODS AND SERVICES |
3 133 |
3 665 |
|
TRANSFERS (PBMR and Broadband InfraCO) |
2 502 273 |
2 127 000 |
|
Sub-Total: Operational |
9 607 |
10 580 |
|
TOTAL |
|
2 137 580 |
Transfers decrease from R2.5 billion in 2007/08 to R2.1 billion in 2008/09. The transfer payment to PBMR decreases from R 2.5 billion in 2007/08 to R1.75 billion in 2008/09. A transfer payment of R377 million is allocated to Broadband Infraco for the first time in 2008/09.
Manufacturing Enterprises
The purpose of the programme is to monitor strategies of Denel and SAFCOL against government’s strategic intent, develop proposals around how SOE can play a catalytic role in the development of the manufacturing cluster and monitor and advise on SOE financial and operational performance.
The priorities of the programme for 2008/09 are:
Portfolio Management;
Develop Denel end-state in partnership with DoD, National Treasury and Denel;
Review of acquisition policy in 2008/09. Facilitating the achievement of the 60% to 70% local defence procurement target over the next 3 years;
Establishing DoD/Industry supplier fora by the end of July 2008 to enhance communication and alignment between industry, Armscor and DoD in defence acquisitions;
Assist with the establishment of Defence Evaluation & Research Institute (DER) in 2008/09;
Development of a missiles export strategy in 2008/09 to leverage technology and increase access to markets;
Establishment of a defence export council by the end of September 2008 to facilitate export marketing support; and
Provide sector support in KLF disposal.[9]
The breakdown of the budget on priority areas is as follows:
|
ITEMS R thousand |
BUDGET 07/08 |
BUDGET 08/09 |
|
COMPENSATION OF EMPLOYEES |
5 041 |
5 788 |
|
GOODS AND SERVICES |
5 316 |
5 853 |
|
TRANSFERS (Denel) |
1 155 000 |
- |
|
CAPITAL |
16 |
- |
|
Sub-Total: Operational |
10 373 |
11 641 |
|
TOTAL |
|
11 641 |
The transfers to Denel cease in the current year. A sum of R1, 55 billion was invested in the previous financial year.
Transport Enterprises
The purposes of this programme include overseeing the activities of Transnet, SAA, SAX in terms of corporate strategy and structure, operational performance, industry structure, corporate governance and policy, financial and risk management, corporate transactions and benchmarking. The programme is also responsible for developing proposals on how SOEs can play a significant role in the development of the associated manufacturing cluster through leveraging their capital and investment programmes via the Competitive Supplier Development Programme.
The priorities of the programme for 2008/09 are:
Portfolio management;
Port of Ngqura (Coega) PSP;
Branchlines position paper;
Ports and Rail master plans approval & implementation;
Railway supplier study;
Monitor Transnet Build Programme;
Monitor New Multi Product Pipeline (NMPP) implementation;
Implementation of SAA turnaround strategy;
Strategic repositioning of SAA Technical; and
Optimal commercial relationship between SAA and SAX.[10]
The breakdown of the budget on priority areas is as follows:
|
ITEMS R thousand |
BUDGET 07/08 |
BUDGET 08/09 |
|
COMPENSATION OF EMPLOYEES |
5 212 |
6 243 |
|
GOODS AND SERVICES |
4 367 |
14 426 |
|
TRANSFERS (SAA and SAX) |
744 400 |
585 000 |
|
CAPITAL |
16 |
- |
|
Sub-Total: Operational |
9 595 |
20 669 |
|
TOTAL |
|
605 669 |
Transfers decrease from R744.4 million (allocated to SAA in 2007/08) to R585 million (allocated to SAX in 2008/09). However operational expenditure increases substantially as the department will be sourcing specialist technical expertise to assist with various priority projects in the sector which will be undertaken in the coming year.
Expenditure Trends over the MTEF Period
The summary of expenditure estimates per programme including transfers in the MTEF is as follows:
|
ITEMS R thousand |
2007/08 |
2008/09 |
2009/10 |
2010/11 |
|
Administration |
62 695 |
65 986 |
69 542 |
73 987 |
|
Energy and Broadband Enterprises |
2 511 880 |
2 137 580 |
1 973 236 |
153 253 |
|
Legal, Governance, Risk and Transaction |
97 078 |
158 163 |
157 402 |
29 049 |
|
Manufacturing Enterprises |
1 165 373 |
11 641 |
11 853 |
12 604 |
|
Transport Enterprises |
753 995 |
605 669 |
19 207 |
20 040 |
|
Joint Project Facility |
14 368 |
28 823 |
34 451 |
27 053 |
|
Total for programmes |
4 605 389 |
3 007 862 |
2 265 691 |
315 991 |
Over the MTEF period, expenditure is expected to decrease at the average annual rate of 59.1%, from R4.6 billion in 2007/08 to R316 million in 2010/11. This of course may change drastically depending on State commitment to capitalise various SOEs – not least of which is Eskom.
The significant decline in 2010/11 indicates the ending of transfer payments to SOEs, with the only ongoing funding of R140 million allocated to Broadband InfraCo.
Expenditure in administration is expected to grow moderately over the MTEF period at an average annual rate of 5.7% to R74 million in 2010/11 broadly in line with inflation but also reflecting the centralisation of services such as training bursaries, IT and leases on equipment.[11]
Over the MTEF period, LGRT expenditure covers the anticipated legal costs associated with a number of transactions, including the disposal of the Komatiland Forest (KLF) by SAFCOL. Expenditure is expected to decrease over the MTEF period from R96.8 million in 2007/08 to R29 million in 2010/11, at an average annual rate of 33%, due the finalisation of the Alexkor settlement.[12]
Expenditure on JPF is projected to grow to R34.4 million in 2009/10, an average annual increase of 23.5% over the MTEF period, mainly due to additional capacity and outsourcing of technical and specialist expertise required to meet the objectives of the JPF over the MTEF period.
Trends between 2004 and 2008
The Department’s expenditure less transfers increased from R69.7 million in 2004/05 to R130 million in 2007/8.Combined transfer payments to SOEs grew at an average annual rate of 95.2%, from R602 million in 2004/05 to R4.5 billion in 2007/08. Between 2004/05 and 2007/08, Denel received R3.7 billion, Alexkor received R170.2 million, PBMR R4.9 billion, SAA received R744. 4 million; and R627 million was provided for the establishment of Broadband INFRACO. The joint project facility (JPF) received R25.8 million between 2006/07 and 2007/08.[13]
Summary of Financial Position of SOEs
The successes of the SOEs themselves inter-alia depend on the collective strength of their respective balance sheets. The SOEs registered the following performances:
Alexkor
Operating loss decreased to R27.3 million in 2006/07, from R209.7 million in 2005/06;
Diamond production declined from 43,207 cts in 2005/06 to 33,765 cts in 2006/07;
The Pooling and Sharing Joint Venture is poised to develop a long term business plan for a viable mining venture.
Broadband INFRACO
It has recently been established and has incurred initial operating expenditure;
SITA has been live on INFRACO network since 18 January 2008.
Denel
Operating costs as a percentage of revenue went down from 146% in 2005/06 to 115% in 2006/07;
In 2006/07 financial year, gross profit improved from the previous years and was positively impacted by increased sales and a decrease in provisions relating to onerous contracts and contract losses;
Net loss went down from R1.363 billion in 2005/6 to R549 million in 2006/07. This amounts to a better than expected result for Denel.
Eskom
operating costs increased and derivative instruments continue to be a concern;
operating efficiency has deteriorated in the third quarter due to the high level of unplanned outages due to the aging fleet of generators and the higher level of demand;
Eskom’s build programme is on track to deliver some 1 155MW to the system during 2008.
PBMR
The gross amount received by PBMR as at 31 March 2007 is R 4, 210 billion. This is made up of contributions from Eskom (R818 million), Industrial Development Corporation of South Africa (R457 million), Westinghouse Electric Company LLC (R450 million) and Exelon (R101 million) and transfers from the South African government (R2, 384 billion). Exelon ceased its contributions in 2002. Total funds transferred to PBMR from Government amounts to R2.165 billion to date;
National Nuclear Regulator (NNR) Stop-Work Order was lifted on 22 December subject to some conditions;
NNR licence was received for Accelerated Cooling Facility (ACF) on 17 January 2008;
Helium test facility achieved 100,000 accident free hours.
SAFCOL
revenue for the year increased in 9 months from R326 million in 2005/06 to R653 million;
profit for the year increased in 9 months from R168 million to R800 million;
operating costs as a percentage of revenue decreased in 9 months from 88% to 72%.
SAA
it registered a loss of R883 million in 2006/07;
profitable domestic and regional operations are overshadowed by losses on intercontinental routes;
Mango brand was successfully launched.
SAX
It registered a profit of R102 million;
The regional operations are well suited to lower demand routes.
Transnet
The company achieved most of its targets and is on target to roll out an R80 billion five-year investment plan;
The capital and reserves figures are looking good but gearing ratio has fallen to below the 50% threshold set by debtors;
The Freight Rail division has failed to achieve on most of the Key Performance Indicators;
In general the company has made significant progress in implementing its turnaround strategy;
The 2006/07 financial year was a year of strength and growth across all the important financial measures.
CONCLUSION
The Committee is of the view that SOEs are in effect state investments capable of being leveraged towards contributing to the attainment of strategic economic goals such as job-creation, skills development and rejuvenation of industrial manufacturing sectors in the economy. The department has done well to position SOEs so as to enhance the strategic roles of various SOEs in attaining some of these goals.
The individual units of the Department have not previously been called to account during the budget process in the form and detail required by the Committee this year. As such, the Department was asked to provide and has provided additional information on the following:
Details of bursaries and loans given to staff and progress report on recovering the money.
Disciplinary matters.
Transfer of staff to other departments and government entities.
Theft of a part of a locomotive in Tanzania by a Transnet employee.
The above reports can be obtained from the secretary to the Committee.
The Department has registered inter-alia the following successes:
The steel sourcing project was completed;
A proposed strategy to leverage the 20-year power build to develop national industry is underway;
Working with the Department of Environmental Affairs and Tourism (DEAT), it developed a framework for the identification and treatment of Strategically Important Developments (SIDS);
It has revised B-BBEE guidelines to align with the Department of Trade and Industry (DTI) generic codes;
It has availed a self-assessment toolkit on its website;
The moratorium on the sale of non-core properties has been lifted;
A property viability study and spatial viability study for Rosherville (Eskom) has been completed;
It has established a cross-cutting artisan training initiative;
The Department of Public Enterprises (DPE) has applied to the Department of Labour (DoL) for the establishment of a Public Enterprise Employment and Skills Development Agency (ESDA). The ESDA will facilitate SETA funded work-place placements for the FET college graduates with SOE suppliers to enable the graduates to obtain trade certificates;
Transnet Pension Fund Amendment Act has been promulgated;
SAA, SAX and Broadband INFRACO Bills have been processed and promulgated;
The Richtersveld settlement has been concluded; and
The ports and rail master plan has been drafted.
However the Department is facing the following challenges:
The delays in the finalisation of the Nuclear Policy could delay the implementation of this element of Eskom’s Build Programme. The Department of Minerals and Energy should be engaged so that the Nuclear Policy could be finalized;
The Department has to more vigorously oversee the maintenance practices across all SOEs;
It has to balance the risk of weakening the balance sheet against the very large investment programmes particularly in relation to Eskom and Transnet;
The development of cost reflective tariffs which are economically more efficient against the inflationary effects and impact on the poor;
Skills scarcity and supplies could delay SOE capital/build plans;
The Department has to procure more effective interfaces as regards those state departments that relate to the core business of SOE, such as the Department of Defence, as it relates to Denel.
The Department has received an unqualified audit opinion in the last year. The emphasis of matter relates to the vacancy rate. It should however be borne in mind that the Department is not a service delivery department. However the vacancy rate in particular units is cause for concern. A case in point is the manufacturing unit which has a particularly high vacancy rate in higher post levels.
Alexkor
The Committee commends the department on the settlement reached with the Richtersveld community. It is of the view that the mining plan and operations must proceed with earnest and that Alexkor will require significant capitalization over the next few years.
Broadband INFRACO
The Committee has been supportive of the strategic aims and objectives of Broadband INFRACO. However synergies in policy and approach must be prioritized in government between the Department of Public Enterprises and the Department of Communications. There are concerns around participation by telecommunications companies in INFRACO’s Africa West Coast cable, funding constraints, timelines and the risk associated with the Nepad / DoC Uhurunet Cable.
Denel
While the restructuring initiative seems to be showing some positive indicators and the Committee was informed during the hearings that progress has been made in supply negotiations with the Department of Defence, the Committee will continue to watch developments in Denel with keen interest.
Eskom
While Eskom has in its latest Annual Report reflected a positive financial position, this aspect of the company will have to be closely managed and monitored given the necessary investments into more generation and transmission capacity. In this regard it is important to note that the scale of the investment in infrastructure in the next 20 years is unprecedented. It is set to approximately double its current electricity supply capacity. This significant increase in investment will mean higher tariffs to users and an increase in government spend and will require Eskom to reduce costs and introduce corporate efficiencies. Consumer behaviour must be addressed and the impact on the economy of the current phased load shedding must be monitored and managed.
In the planning of future generating capacity the Committee is of the view that while coal-fired technology may be more cost efficient more consideration should be placed on alternative clean (e.g. nuclear) or renewable (e.g. solar) technologies. While these technologies are more expensive, the cost to the quality of the air, health and the devastating effects of global warming should be factored into the planning process. These are not aspects that can be removed from considerations of economic growth and prosperity of the nation.
PBMR
The shareholder compact requires finalization and the regulating framework within which the company operates must be streamlined and policy developed in this regard.
SAFCOL
Land claims of forested land must be resolved as soon as possible in order to facilitate the future business and enable the development of business strategies of this entity.
SAA
Customer services, the financial position and efficiencies need to be improved. The restructuring process should be finalized. There is insufficient yield and revenue management.
SAX
The financial position is sound and the prospects are good. It demonstrates continued good performance. There are opportunities to expand SAX’s business model further into the SADC region.
Transnet
Safety and efficiencies in Transnet Freight Rail need to be enhanced significantly. Tariff increases to fund the build programme should be within reason. The Committee will watch this matter closely.
[1] ENE 2008: 625
[2] Public Enterprises 2008 – 2011 Strategic Plan and Financial Overview: 04
[3] Public Enterprises 2008 – 2011 Strategic Plan and Financial Overview: 05
[4] ENE 2008: 626
[5] Public Enterprises 2008 – 2011 Strategic Plan and Financial Overview: 24
[6] Public Enterprises 2008 – 2011 Strategic Plan and Financial Overview: 32
[7] Public Enterprises 2008 – 2011 Strategic Plan and Financial Overview: 34
[8] Public Enterprises 2008 – 2011 Strategic Plan and Financial Overview: 26
[9] Public Enterprises 2008 – 2011 Strategic Plan and Financial Overview: 28
[10] Public Enterprises 2008 – 2011 Strategic Plan and Financial Overview: 30
[11] ENE 2008: 631
[12] ENE 2008: 633
[13] ENE 2008: 629
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