Transnet, Denel, SA Airways, SA Express & Eskom briefings & Department Strategic Plan deliberations

Meeting report

Transnet presentation
Mr Chris Wells, Acting Chief Executive Officer, Transnet, presented the document setting out the strategic plans and budget of Transnet (see attached document for details). He provided an overview of Transnet’s achievements, the changes in Economic Environment and Transnet’s Strategy. Mr Wells then discussed the regulatory environment facing Transnet, the entity’s 2009/10 corporate plan, risk and mitigation plans and the strategic priorities for 2009/10.

Discussion
Mr S Van Dyk (DA) asked how much of the required R80 billion would be from shifting assets around and questioned whether a R5 billion growth in three years was really progress.

Mr Wells replied that the R80.5 billion would be utilised to invest in increased capacity and infrastructure. He added that Slide 36 illustrated clearly how it was being funded.  Mr Wells stated that Transnet had proceeded along a stability strategy in 2004 because the business had a lack of investment for a number of years; one growth inhibitor had been the lack of infrastructure. He added that there had been very impressive growths that had occurred more recently, but that now it was in a position to embark upon more heavy growth.

Mr P Van Dalen (DA) asked why, if there was an increase in profits, there were not more railtrucks on the rails. He cited the non-compliance with safety, which was mentioned in the presentation as a high risk, as of great concern.

Mr Wells replied that market share indeed was lost to road, but that Transnet now had a special project to get containers back on rail.  He added that theft and vandalism was highlighted primarily because of accidents as well as theft. Transnet had suffered significantly from cable theft but now had an expert security service working in conjunction with the police to monitor this.

Mr M Oriani-Ambrosini (IFP) stated that it appeared that Transnet did not need government involvement, and asked if there was a compelling reason for Transnet to remain a government entity.

The Chairperson replied that the question was inappropriate as it was a policy issue, which Parliament dictated, not Transnet.

Mr Oriani-Ambrosini replied that he was asking if there was a business reason, not a political or policy reason.

The Chairperson stated that if Transnet wished a reply could be given. 

Hon Enoch Godongwana, Deputy Minister of Public Enterprises, replied that the decision to sell a State Owned Entity (SOE) such as Transnet was the pejorative of Government and that it would not seek the entity’s advice on the matter. However, he added that the he could not understand the logic of selling a SOE, in view of its profitability.

Mr M Nhanha (COPE) stated that he was worried about recent decisions from Transnet not to invest in the East London harbour, which he felt were hampering investment quite severely. He asked if there were any plans for the future.

Ms Y Bam-Mugwanya (ANC) requested that the presentations be delivered much sooner before the meeting to enable Members to study them properly.

Mr J Maake (ANC) asked for clarification on Slide 39.

The Chairperson asked about the Victoria and Alfred Waterfront development

Neither of these appeared to have been answered.

Denel Briefing
Mr Zwelakhe Ntshepe, Group Executive: Business Development and Corporate Affairs, Denel, went through the presentation (see attached document). He noted that Denel had four leading projects – landwards defence, air force products, naval products and other products , including mine clearing. He stated that 60% of products were sold to the Ministry of Defence. Mr Ntshepe stated that Denel was a decentralised structure with all entities directly or equity controlled. He stated that Denel was very active in the Middle East, that India was a problem it was trying to rectify and that it was targeting South Korea, Mexico and Venezuela.

Mr Ntshepe stated that 92% of Denel Aviation’s income was from the South African Air Force (SAAF). In regard to the SAB Aerostructures there were problems with the A400M, but Denel was  helping along negotiations with Airbus. Denel Integrated Systems Solutions was a new company derived from Denel Dynamics that was focused on highly integrated capacities and was anticipating its second contract. The Denel Overberg Test Range was stated as being a premier facility and the only one of its kind in Southern Africa. It was anticipated that it would ‘break even” and keep the capability within the country.  Denel Land Systems was doing well. He said that the  United Arab Emirates was its most important customer and it was looking forward to being very profitable.

Mr Fikile Mhlontlo, Group Financial Director, Denel, outlined the finances of the company. He said that Denel had managed a turnaround and was containing losses, and non-core businesses were now disposed of. He stated that the balance sheet was still weak and that the company was highly geared and still depended on government support. Mr Mhlontlo stated that order covers were inadequate and that interest was a problem. This was cited as being partly due to the Government spending on outside suppliers.

Mr Mhlontlo briefly referred Members to the five pillars of Denel’s Macro Strategy, as set out in the document attached, and stated that its priorities were informed by risk management.

Discussion
Mr Oriani- Ambrosini stated that taxpayers were confronted with a very large bill. He added that Denel had said that it had very good products and research, but problems due to no-one wishing to buy them. He asked whether the way forward was doing more of the same, or doing massive restructuring that would investigate new aspects such as, for example, nano-technology.

Mr Ntshepe replied that research was largely client funded. Denel was looking at equity partnership in the missile business. He stated that out of 7 200 Denel employees, only ten were expatriates. He added that in terms of the process of transformation, this has been started but transformation had not happened yet. He also added that in all their equity partnerships, Denel held the intellectual property rights,

Ms Bam-Mugwanya stated that a certain project reflected a loss across the years and asked how Denel anticipated improving this loss.

Mr Ntshepe acknowledged that was unacceptable.

Mr M Nhanha (COPE) wanted to know what the situation with the Indian government was, and why there was no trade with African countries.

Mr Ntshepe responded that in India Denel was effectively blacklisted, This was not official, but all contracts had been cancelled and it was no longer invited to tender. He added that this had been the case for four years and that Denel was currently engaged in arbitration. Mr Ntshepe said that they needed a political solution.

South African Airways (SAA) Briefing
Mr Chris Smyth, Acting Chief Executive Officer ,SAA, prefaced his presentation with a comment that the auditors were still in the finalisation stage of their audit. He then tabled and went through the document attached to this Minute. Mr Smyth outlined the context of SAA, stating that it had more than 6.5 million passengers and exhibited strong operational performance for the 2008-09 financial year. He added that it had a sustainable future amidst the harsh economic environment due to restructuring. Challenges facing SAA were cited as being recapitalisation, pre-delivery payments from legacy Airbus order, hedging, anti-trust litigation and deteriorating global economic conditions. Mr Smyth highlighted SAA’s goal of focusing on African business markets while providing global reach through limited profitable endeavours, via major gateways in each continent, supported by strong alliance partners.

Discussion
The Chairperson stated that the report was scant on detail and added that she would like a fuller report.

Mr Smyth stated that SAA did not retrench anyone last year, but that 1 000 people had left. He added that the figure of 1.2 bag claims per 1 000 was now down to 0.5. He added that the R70 billion loss was a reference to the entire industry. Mr Smyth stated that SAA had direct involvement as well as co-sharing indirect involvement across the globe.

The Chairperson interjected that the Committee was unfortunately running out of time and asked that the Deputy Minister address the meeting before he had to leave.

Deputy Minister’s address
Hon Enoch Godongwana, Deputy Minister of Public Enterprises, stated that there was provision in the relevant legislation for Eskom to make a late submission, and that this lateness was largely political as there was large scale debate over certain issues. The Minister of Public Enterprises had written to the Minister of Finance for an exemption. He added that he had the Minister of Public Enterprises’ assurance of a commitment to the poor.

South African Express (SAX) Briefing
Ms Siza Mzimela, CEO, SAX, stated that SAX focused on smaller markets. She ran through the presentation attached to this Minute. She pointed out that SAX had a similar strategy to SAA and focused on a secondary regional role. Ms Msimela stated that SAX was expanding a route to the Democratic Republic of Congo (DRC). She added that the majority of SAX passengers were business travellers commuting between major hubs and secondary routes. She outlined the current route network and stated that the current SAX fleet was composed of 23 aircraft, which were all of relatively young age.

Ms Mzimela stated that the revenue had more than doubled over the last five years, that SAX had become solvent in 2007-08 and sustained this. Ms Msimela stated that in terms of Balance Sheet performance, SAX was on target to increase total assets by over 30% compared to last year and that it had a positive nett asset value.  She outlined the short term and long term goals of the entity, as well as its regional expansion strategy of attempting to establish hubs in Central, East and West Africa. The expansion into the DRC via Lubumbashi was discussed. Operating and economic challenges were outlined as well as the impact of the global recession.

Presentation by Eskom
Mr Fani Zulu, Acting CEO, Eskom,  tabled and presented his document (see attached) on the activities of Eskom. He stated that the electrification programme over the last four years had resulted in four million people coming on board the grid. He added Eskom was comfortable with being able to supply adequate capacity for 2010.  He added that the bulk of activity would take place in host cities and that it was working in partnership with municipalities in joint response teams to ensure adequate infrastructure. Mr Zulu stated that ineffective risk management had led to low reserve margins, that in 1999 it had  a reserve of 21%, and that by 2007 it had dropped to 5.1%. There was an increase to 1% in 2008. He added that counter-measures introduced seemed to be working. Mr Zulu also stated that South Africa was the cheapest cost producer of electricity in the world, with the next being Canada.

Mr Zulu added that the constraint in the reserve margin had led to load shedding in 2007, and that Eskom was seeing an increase in cost due to operating all power stations on coal facilities but that it no longer had its own dedicated mines. He stated that R385 billion over five years of capital expansion would serve as a massive economic stimulus, and that Medupi and Kusile would be the fourth and fifth largest plants in the world, with the pace of building 30% faster than normal. This capitalisation ranked amongst the largest global construction projects. He said that there were lots of ancillary benefits due to the massive scale of construction.

Mr Zulu added that Eskom had submitted an interim application for a 34% price increase and that between now and March 2010 there would be no further hikes.  He added that in 2009/2010 there would be a R163 billion cash flow, which reflected a massive increase in capital expenditure. In terms of primary energy costs, a key increase was the use of short term coal. Normally stations were matched to a coal mine on site, but the effect of running stations hard had involved using more coal than long term resources had catered for. Furthermore de-mothballed stations saw a massive increase in the use of short term coal and manpower increases. All round cost increases were reflected in operating costs, including personnel and maintenance.

Discussion
Mr Van Dyk stated that the 34% increase was attributed to personnel and coal cost increases, but he noted that Eskom had retrenched a lot of people and that coal profits seemed to be up by 200%, as the coal companies were being subsidised.

Mr Van Dalen stated that Eskom had not complied with the legislation for the tariff increases as its submission was late, and he asked why this as so. He asked what the profit of Eskom was, as there was no information on income, and he also asked where this information was. Mr Van Dalen displayed dismay that there was a loss of R1 billion due to theft and vandalism.

Mr Zulu replied that Eskom responding in the right way to the theft and that there was a reduction, he offered to supply Mr Van Dalen with a report on the matter. He stated that the submission for a tariff increase was delayed due to needing the necessary information; furthermore the slow down in the economy necessitated Eskom needing to recalibrate its projections and plans. Last year Eskom had received a R176 billion guarantee from the Minister of Finance; prior to this announcement it could not have supplied the correct figures. Mr Zulu added that Eskom was about to publish its financial statements. He added that when Eskom converted to a company the dividends owed to Government were held as capital.

Mr Nhanha stated that to say that massive employment would result from something, and to see it actually happening, were two very different things. He also added that comparing South Africa to Canada in terms of production costs was incorrect, as South Africa was a developing nation. Mr Nhanha also asked what protection the poor were afforded against these tariff hikes.

Mr Zulu responded that there were hard targets in the building of stations and that Eskom had 3 000 people on sites. Furthermore in Lephalele 700 houses were about to be occupied. He added that there was also a Southern African Development Community (SADC) study that reiterated Eskom’s low cost of production in addition to the comparison with Canada. He stated that he would share this report with Mr Nhanha. Mr Zulu replied that the National Energy Regulator of South Africa (NERSA) had capped an increase total of 4.5% for the poor last year and that, considering there were different tariff groups, Eskom would be able to protect the poor by heightening some rates and lowering others.

Mr Oriani-Ambrosini requested audited financial statements from all the SOEs, so that the Committee Members could actually exercise oversight.

The Chairperson stated that she was certain this could be complied with.

Department of Public Enterprises Strategic Plan 2009/10 and Budget Vote 30
The Chairperson stated that the Members needed to adopt the Budget Vote, as last week the Department tabled its budget plan for operations for consideration by the Committee.

Mr Van Dyk asked whether it was not what he described as “a bail-out”, as R5 billion could not be just for operational expenses.

Mr Oriani-Ambrosini asked who the Members could hold to account for the decision for retaining SOEs that should be ditched.

The Chairperson stated that the meeting was presently concerned merely with tabling the budget.

However, she noted Mr Oriani-Ambrosini’s position, and added that SOEs’ budgets and bailouts would be looked at in August.

Mr Oriani-Ambrosini stated that on account of this, the IFP had a major policy disagreement, in that it did not agree that Government should be retaining SAA and Denel. For this reason it could not endorse the Department of Public Enterprises’ budget.

Mr Van Dalen stated that the DA would not support it either.

Mr Nhanha stated that it his understanding that this vote was intended to confirm that he Department of Public Enterprises could have the funding to perform its mandated functions, and as such, COPE supported the vote, provided that this Committee  would keep the Department in check, especially with regards to bailouts.

The Chairperson added that the ANC was also not happy with the performance of Denel, but that the ANC Members noted that change was happening.

Mr Maake stated that the ANC therefore in broad principle supported the budget vote, but added that when specific budgets and performance were debated, this issue would also need to be debated.

The vote was then taken, and the Chairperson stated that the majority of Members had passed the resolution. The reservations of the DA and IFP were noted.

The meeting was adjourned.