Transnet Pension Funds funding solution: report by Committee Task Team; Alexkor on its 2009/10 Annual Report

Meeting report

Opening Statement
The Chairperson welcomed the new Minister, Mr Malusi Gigaba (in absentia), and thanked the outgoing Minister, Ms Barbara Hogan, on behalf of the Committee for her contribution to the country.

The Committee task team set up a few weeks ago was told to work with the Department of Public Enterprises (DPE), National Treasury (NT) and Transnet to seek a funding solution for the Transnet Second Defined Benefit Fund (TSDBF) and the Transport Pension Fund (TPF). Even though the task team would present the report, the DPE, NT and Transnet’s presence at the meeting was crucial to show that the resolution was agreed upon by all parties. The Representatives of Pensioners had requested to address the Committee but had been told that it would not be possible, as there were rules and procedures to allow the public to speak in meetings of Parliament. This was not the kind of forum that allowed them to speak. She noted that the “black widows” of the TSDBF were supposed to attend the meeting but they were not present.

Mr Koos Coetzee, Convener of Pensioners: Representatives of Pensioners, replied that they had wanted to bring some of the black widows, but unfortunately, the flights were too costly.

The Chairperson said it was not the fault of the Representatives of Pensioners as it was not their responsibility. The Committee had told Transnet to finance the travelling arrangements of black widows. However, Transnet was not even present at the meeting today. She had received a text message from Mr Vuyo Kahla, Transnet Group Executive: Office of the Group Chief Executive, suggesting that the meeting should be cancelled because a media statement had been issued by the NT that negated the agreement Transnet had made with the task team. He then suggested that the meeting should be cancelled and the NT told not to attend. She had informed him that she did not have the authority to cancel the meeting and could not instruct the NT not to attend. Mr Kahla said that Transnet did not want to differ with the NT in public. She told him that the meeting would take place with or without Transnet. Subsequent to this conversation she received information that the NT and Transnet would not be attending the meeting. This information was contained in an email sent from Mr Kahla. She reiterated that the meeting would take place with or without Transnet, but she was happy the NT had made it to the meeting.

Report back from the Task Team on the Funding Solutions for the Transnet Pension Funds
Ms G Borman (ANC), as chairperson of the task team, reminded the Committee that a small task team had been formed on 17 September 2010 consisting of herself, Mr C Gololo (ANC), Dr G Koornhof (ANC) and Dr S van Dyk (DA). The team was mandated to find possible funding solutions for the Transnet Second Defined Benefit Fund and the Transnet Pension Fund that would address matters concerning ex gratia payments that would compensate pensioners for low amounts paid out in the past, increase the base pension of the pensioners, and improve policies going forward.

The first meeting was held on 5 October 2010 with the DPE, NT, Transnet and some legal advisers. The government was requested to develop proposals based on an ex gratia payment plan. Transnet was requested to develop proposals for uplifting the base of the pension and allowing for an increase of 75% of the Consumer Price Index (CPI) on the uplifted base. It was agreed that the task team would deal with the TSDBF and the TPF at the same time.

A second meeting was held on 26 October 2010. It was decided that the affordable contribution to both funds that would improve the situation of the pensioners was an injection amount of R1,9 billion.

After thorough deliberations with Transnet, the NT and the DPE, and after consultations with parties, study groups and clusters, the task team proposed the realistic and affordable scenario of an injection of R1,963 billion. This would allow for a 7.4% base uplift and prospective increases of 75% of CPI should no ex gratia payment be made. However, the task team also thought that an upfront ex gratia payment should be made to pensioners to provide them with some immediate relief. Two options were proposed to the Committee:

▪ An ex gratia payment of 1.75 months’ pension which allowed a 5.93% upliftment to the base pensions; or
▪ An ex gratia payment of five months’ pension giving a base upliftment of 3.21% based on the current inflation rate.

The task team recommended that Transnet, the NT and the DPE implement the proposal (to be adopted by the Committee) by 31 December 2010.

Discussion
The Chairperson thanked the task team for the work they had done to resolve the pension fund issues. She noted that the report dealt with the TSDBF as well as the TPF. It needed to be clarified in the recommendation that the proposals applied to both funds.

The Committee replied in the affirmative.

Mr K Dikobo (AZAPO) noted that the report showed that there would be an injection of R1,963 billion into the fund. He asked if this amount was for both the TSDBF and the TPF.

The Chairperson replied that it was one amount for both funds.

Mr Dikobo added that he favoured the first proposal in the report. The amount if money seemed to be too little but the carry-through effect was great.

The Chairperson asked if the NT knew from where the figures in the proposal came.

Ms Avril Halstead, Chief Director: Sector Oversight in the NT, answered that the NT was still working with the DPE and Transnet and they were in the process of finalising the way in which the exact funding contribution would be put forward. Discussions were still being held about where the R1,963 billion would come from. However, they believed this number was an affordable number that was in line with the requirements that the Committee outlined.

Mr P van Dalen (DA) thanked the task team for the effort they put into to the proposal. It was apparent that many of the pensioners were quite elderly. If they were to uplift the base, then someone that was still at the beginning of his/her pensionable age would be able to benefit from it. However, he thought that many of the pensioners were looking for immediate relief. Therefore, he supported the second proposal, which was the ex gratia payment of five months’ pension and the uplifting of the base going forward. This would give pensioners more relief.

The Chairperson noted that it was not the Committee’s concern as to where the NT, Transnet and the DPE were going to find the money for the pension funds. They could have used the medium term budget process to find money for the funds. She proposed that the date in the recommendation be amended from 31 December 2010 to 15 December 2010 so pensioners could have a better Christmas.

Mr F Hajaig (ANC) commented that she agreed with Mr van Dalen. She thought the second proposal was the best option.

Dr S van Dyk (DA) agreed that the date had to be moved up to 15 December 2010, as it was important to resolve the issue before the end of the year. He also agreed that the second option was better, as pensioners were greatly in need of having cash on hand to purchase basic goods and services, and to pay medical costs.

Dr G Koornhof (ANC) added that it was never the task teams mandate to correct all the mistakes of the past when it came to the pension funds. The task team was mandated to see how they could assist pensioners that were in dire need of relief. It was remarkable, in this economic climate, for the parties involved to have agreed on a R1,963 billion cash injection into the funds. This was a major achievement, as the pension increases per year would also be amended to be inflation-related. The NT and the DPE would have to find the money and split the costs of the cash injection. Despite negative reports in the media, the task team worked well with the NT, DPE and Transnet from the beginning. This faith had not been broken. He noted that the injection of R1,963 billion resulted in a base upliftment of 7.4%. The moment the money was used for ex gratia payments, the base percentage uplift would decrease. The report showed two options for moving forward. He warned the Committee against mobbing for the higher ex-gratia option, as there were risks involved. Members had to apply their minds to the two options.

The Chairperson noted that Dr Koornhof seemed to favour the first option.

Mr M Nhanha (COPE) seconded the comment.

Mr van Dalen said that he had done a calculation and worked out that if the Committee chose the first option, it would take 12-14 years for pensioners to get what they could have gotten if they had been given the second option. It would be more advantageous for pensioners if they received the second option.

Dr Koornhof added that if the Committee chose the higher ex gratia payment option, he was sure there would be tax implications involved. Secondly, the base uplift would drop to 3.21%. He wanted the Committee to be sure that they knew the risks involved if they adopted that scenario.

The Chairperson said that the Committee also had to keep in mind that if they chose the higher ex gratia option, the pensioners would also be receiving an increase of 75% of CPI on their pension. This could mitigate the effects of the lowered base. Initially, she also favoured the first option, but she had received many letters from the pensioners saying that they desperately needed the cash. She was now more inclined towards the second option.

The Chairperson noted the adoption of the second recommendation. She asked that the NT, DPE and Transnet work together to find the money wherever they could so that the resolution could become a reality. She asked them to report to the Committee through the Office of the Chairperson by 15 December 2010. She asked Members to think about the impact the Transnet Pension Fund Act would have, if it remained unchanged. The Committee could not leave the Act unamended.

Dr van Dyk said the Chairperson was correct. Rule 24 in the schedule to the Act determined that the Board of Trustees of the fund had the responsibility to amend the 2% pension fund per annum increase with the approval of Transnet, NT and the DPE. The Committee made the recommendation and the Trust had to amend the rule. This had to be done before 15 December 2010.

The Chairperson agreed that the rule had to be amended before 15 December 2010.

Ms Hajaig worried that a deadline of 15 December 2010 would be too early. She wondered if the Committee was being too ambitious, as she did not want to give the pensioners false hope. She proposed that the Committee include in the recommendation that the Committee would promote the implementation of the recommendation by 15 December 2010. This would ensure that the Committee was not binding its hands.

Dr Koornhof asked the Committee to close the discussion. The Committee had made its recommendation and it was the NT, DPE and Transnet’s duty to figure out how to implement it. The process had to kick in immediately, but he did not want the Committee to create the impression that things would happen immediately. If the process could be completed by a certain date, that would be fine. However, the issue was not about the deadline being met; it was about unfolding a process where there would be a cash injection of R1,96 billion. The NT, DPE and Transnet had to report back to Parliament so the Committee could monitor their progress.

Dr van Dyk said that the rolling out of the process could take years. The Committee had to give guidance on a timeframe.

The Chairperson thanked the task team, Transnet, the NT and the DPE for participating in the discussions and finalising the resolution. This was an issue that had to be resolved a long time ago. The Committee did not want to create expectations for the pensioners; however, there was an expectation from the Committee that the NT, DPE and Transnet would fast track the process and report back to the Committee by 15 December 2010.

Moving to the second item on the agenda, the Chairperson informed the Committee that Alexkor CEO, Ms Khetiwe Maseko-McClain, had called her the previous night to apologise as she would be unable to attend the meeting. One of Alexkor’s female workers had been found dead in Alexander Bay and she had to go to there to attend to the matter. 

Alexkor Annual Report Briefing
Mr Reginal Muzariri, Chairman: Alexkor, told Members about the entity’s operations. He explained that companies were contracted to recover diamondiferous gravel along the coastal strip from the mouth of the Orange River to south of Port Nolloth. The gravel was delivered to an Alexkor operated plant for processing and the recovery of diamonds. The diamonds were then sold on tender at the Johannesburg Diamond Exchange. The proceeds of the sale were shared between the contractor and Alexkor. Notwithstanding the effects of the economic downturn, Alexkor had kept its operations going and did not downsize or effect any retrenchments. Alexkor’s gross revenue from diamond sales amounted to R163.8 million, compared with R127.5 million for 2009. The increase was due, mainly, to increased diamond production and a higher volume of carats produced.

The Deed of Settlement (DoS) signed between Alexkor, the state and Richtersveld Community in 2007 envisaged the establishment of a Pooling and Sharing Joint Venture (PSJV) with the Richtersveld Community in which the land mining rights would be ceded to the community and Alexkor would hold the marine mining rights. The DoS required the conversion of the old order land and marine mining rights. On 28 January 2010, the application for the conversion of the old order mining rights was granted and the right was executed on 19 May 2010. The conversion of marine mining rights was granted and executed on 2 July 2010. All had been done for the cession on Alexkor’s behalf.

Alexkor’s health and safety had been a major focus over the past year. The entity underwent an independent health, safety and environmental audit in February 2010. An audit score of 86% was achieved, which showed a decisive improvement in safety considerations. Although there were improvements, minor injuries remained a concern. Alexkor had reviewed its Health, Safety and Environmental Management Plan, primarily to address the matter.

Mining operations at Alexkor’s land operations continued at curtailed levels to preserve the asset being transferred to the Richtersveld Community while still generating revenues to sustain operations. In order to bolster carat production, it was decided after consultations with the Richtersveld Community that Alexkor would invite interested parties to express interest in contracting in the deep sea, middle sea, shallow water, beach, and on the curtailed areas of land mining. The submitted tenders were subjected to rigorous review in accordance with Alexkor’s tender processes. Among the operations was the contract of a women’s group at an area called Witvoorkop. This was in line with Alexkor’s undertakings to increase the participation of women in mining.

Alexkor’s Annual Financial Statements (AFS) received an unqualified audit opinion from the independent auditors, PricewaterhouseCoopers (PwC). In terms of non-current and current assets, cash held in the Rehabilitation Trust increased by 18% to a total ofR32.8 million. The cash was held to address historical environmental liability. Inventory included diamonds to the value of R7.4 million, while trade and other receivables decreased by R5.3 million due to irrecoverable debts and impairments. Cash increased by R141 million. This was due to government grants received to the value of R129 million.

The Post Retirement Medical Aid Liability was reduced from R135 million to R90 million. The liability was capped to reduce the open-ended liability the company was facing on previous subsidy levels. The Environmental Rehabilitation Liability increased from R239 million to R256 million after it was adjusted on a CPI linked basis. Trade and other payables consisted mainly of government grants and prepaid income.

Diamond sales for the year equaled R163.9 million. The increase of 28.5% was due to the increase of carat production. This increase in revenue reduced the gross operating loss to R6 million compared to the R26.6 million loss in 2009. The net operating profit improved significantly from a loss of R77.5 million in 2009, to a profit of R26.9 in 2010. The improvement was mainly because of non-cash movements in the Statement of Comprehensive Income relating to the Environmental Rehabilitation Liability and the Post Retirement Medical Aid Liability. The profit for the year, after tax and interest, increased significantly to R36.1 million. This was due to non-cash adjustments. Alexkor managed to accumulate interest on the cash it invested with recognised banking institutions of R8.9 million for its own account. Cash flow from operating activities showed an inflow of R8 million due to increased production of diamonds which then led to increased sales. Strict cost-cutting measures also helped. Cash flow from investing activities showed an outflow of R4.5 million because of capital expenditure incurred. Alexkor’s own cash reserves decreased during the year with an outflow of R1.1 million for the year.

Overall, the AFS showed that revenue increased by 28% during the 2009/10 year, gross operating loss decreased by 77%, profit increased by 155%, accumulated loss decreased by 15%, and capital expenditure increased by 359%. In terms of the rehabilitation project, Alexkor focused on the back-filling and netting processes at the south-east side of Boegoeberg. The back-filling process was completed in February 2010 and approximately 54km of netting was completed.

During the financial year, Alexkor updated the majority of its policies, which were outdated. The performance process had been signed off by the board and the performance contracts with management were being finalised. The process should be up and running by the end of this financial year.

Discussion
Dr Koornhof noted that three of Alexkor’s executives were in acting positions. Another executive had recently resigned as well. This meant that more than 50% of the entity’s executive management would be in acting positions. He asked Alexkor to comment on this. In the presentation, Alexkor said that the delay with the Deed of Settlement lay with the Richtersveld Community. He asked what the issues were that caused the delay. Alexkor received an unqualified audit report, but this was not a basis of measurement if there were serious emphasis of matters listed in the auditor’s report. There were serious issues regarding non-compliance with reporting requirements for performance management, quarterly reporting, submission of performance information, usefulness of information, and information about performance targets were very vague. There was also a lack of reporting on all predetermined objectives and the corporate plan was not up to date. These were serious emphasis of matters. He wanted to know what Alexkor had done to correct this and what measures they had put in place to prevent receiving another audit with emphasis of matters. There was a case of diamond theft that started in 2006 and eleven people were arrested on 12 April 2010. He asked for an update on the matter.

Mr Muzariri replied that one of the issues was that there was an agreement in terms of the DoS that there would be joint appointment of key roles within the pooling and sharing joint venture. Accordingly, when there were resignations, Alexkor in consultation with its partners from the Richtersveld Community, felt that the roles had to be formalised as permanent roles. This was the issue that constrained Alexkor from making appointments. Alexkor was working with the representatives of the pooling and sharing joint venture to work towards some timelines for implementation of the DoS. The only item that was still outstanding from the Community was the resolution confirming their acceptance of the mining rights, which they needed to do as part of their requirements. Alexkor’s understanding was that their resolution, which had to be approved at an annual general meeting, was being held back due to internal disputes that were happening within the Community. Accordingly, the resolution had been delayed. In general, everyone in the Richtersveld Community was supportive of Alexkor moving forward with the pooling and sharing joint venture. On 22 November 2010, when they have their hearing with the Courts, they would hopefully reach an amicable settlement as to who their representatives were. Alexkor expected that some of the acting positions would then be formalised as permanent positions.

Mr Muzariri answered that the issue of the unqualified report needed to be put in context, particularly if one looked at the number of corporate governance matters that were raised. In the past year, The Auditor-General (AG) had come out with expanded reporting requirements for government departments and State Owned Entities (SOEs). This required specific reports to be in place. This was the first year that Alexkor experienced those requirements. There were processes and procedures in place to address a number of issues, but Alexkor did not have the specific reports that were required by the AG. Alexkor’s external auditors were therefore obliged to raise such non-compliance as emphasis of matter items. During the current operating year, Alexkor had completed quite a number of those reporting requirements. The entity had a session with its auditors approximately two weeks ago and they were happy with the level of progress that had been made. Alexkor was confident that it would not receive similar emphasis of matters in their next annual report.

Mr Wiaan Basson, Acting Mine manager: Alexkor, addressed the matter of the mine theft. He said that eleven people were arrested. Three of the individuals were Alexkor employees and the rest were either part of a syndicate working in Port Nolloth or in Alexander Bay. The case was now in the hands of the courts.

Dr van Dyk wanted some direction on the satisfaction level for the attendance of meetings by Alexkor’s senior management. Were they satisfied with the quality of the meetings and the attendance? Alexkor had diamonds to the value of R7.4 million. This was, in fact, very little and nothing to brag about. It seemed that the company was just staying afloat. He asked if Alexkor had plans in place to become a profitable company in the future and to become an asset to the country.

Mr Muzariri replied that the board consisted of a composition of members with technical, financial and social expertise that would drive the entity in the right direction. One of the challenges that they faced during the 2008/09 financial year was that they had a slightly expanded board with nine members. They found that a number of board members grappled with understanding the DoS and the level of engagement that was needed with the community. This disrupted some of the engagements. During the 2009/10 financial year, the board was downscaled to six people so they could become more responsive and focused during discussions. He said that the board had very good engagements during 2009/10. As the company expanded it would be necessary to look at expanding the size of the board once again so there could be better workload distribution.

He said the unfortunate truth was that since 2007, the entity had been in limbo due to the need for the DoS to be implemented. The reality was that Alexkor got caught in a cycle where the Department of Mineral Resources had embarked on a nation-wide process of getting everyone to convert their old order mining rights to new order mining rights. There was a queue of applications that had to be processed. This was the single biggest delay in the whole process. In 2007, Alexkor started with somewhat of an antagonistic relationship with the Richtersveld Community, but engagements between the two had improved considerably.

Mr C Gololo (ANC) asked why the former Minister, Ms Hogan, delayed the signing of mining rights to the Richtersveld Community. He noted that the cash that was held in Alexkor’s Rehabilitation Trust increased by 18%. He asked what the original amount was that was in the Trust. There was conflict between two executive committees in the Richtersveld Community. Both committees claimed to have been elected legitimately. How true were the allegations and how was this impacting on the DoS?

Mr Muzariri noted that he had already addressed the questions concerning the signing of mining rights.

He addressed the question on the Rehabilitation Trust. In 2009, the amount of money that was in the trust originally was R27.7 million. Previously, Alexkor had contributed approximately R200 000 a month to the Trust. This was increased to approximately R1 million a month, which resulted in the 18% increase.

He answered that Alexkor had received correspondence from a new party that claimed to have been appointed. They were engaging with both parties, advising them about the processes that they had to follow.

Ms Borman referred to the notes to the Annual Financial Statements (AFS) on page 66 of the Annual Report. She noticed a substantial increase in the amount for split contractors from 2009 to 2010. She did not understand what split contractors were and why there was such a big increase.

Mr Muzariri replied that page 66 highlighted the revenue split that went to contractors in their respective areas. There was a revenue sharing model that Alexkor worked with that looked at the level of risk that each party was taking on.

Mr Nhanha said that he was not an authority on conflict resolution, but he wanted to express his disappointment about the Richtersveld Community’s inability to resolve their conflict. When he left Alexander bay on 16 May 2010 he felt good about what had been done. Then a few weeks later, he read in the newspaper that they were fighting. It seemed that the project was spiraling downwards to failure. He was truly disappointed. He was also disappointed with the Alexkor delegation that was before the Committee because there were four men and not a single woman on the team. They had to correct this situation.

Mr Muzariri answered that Alexkor recognised that it needed to work on ways and means to having better working relationships with their communities. This meant having a closer relationship with communities than they had in the past, even though it might not be their obligation.

He said it was regrettable that their delegation was not appropriately representative of Alexkor. They would address this matter immediately and do their best to be appropriately representative in the future.

Mr A Mokoena (ANC) said that it seemed that Alexkor’s CEO, Ms Maseko-McClain, worked on a very ad hoc basis. She was contracted to Alexkor but she “parachuted” in and out; she was basically just a visitor. A company could not be run this way. Alexkor needed a CEO that could be hands-on. If the CEO had been present in Richtersveld Community more often, they could have had better interactions and the problems that were happening there now, could have been quelled.

Mr Muzariri replied that the board had started looking at ways they could increase management’s level of involvement in the community. Currently, the CEO stayed at the mine for a week every second week. He recognised that this might not seem sufficient given the amount of work being done on the ground. The board would take another look at the matter and address the problem. He reminded Members that the CEO was usually the one that managed operational and strategic matters while the mine managers worked on site.

[The Chairperson had leave the meeting and asked Ms F Hajaig (ANC) to chair in her place.]

Chairperson Hajaig noted that Alexkor had spoken about “beneficiation”. It seemed that this word seemed to be bandied around quite often. She did not know what it meant anymore. She wanted Alexkor to provide, in writing by 15 November 2010, how they were going to address their beneficiation processes. She reiterated that it was unacceptable that they did not have any women in their delegation. She wondered how many executives in Alexkor’s management actually lived in areas where the work was being done.

Mr Muzariri answered that in terms of the Board, there was no one that lived in Alexander Bay or the Richtersveld Community. One member lived in another area in Northern Cape and the others lived in Johannesburg. All of the mine managers lived on site.

Chairperson Hajaig concluded the meeting, saying it had been a fruitful discussion. She thanked the Alexkor delegation for their presentation.

The meeting was adjourned.