Department of Public Enterprises 2011 Strategic Plan

Meeting report

Department of Public Enterprises (DPE) Strategic Plan 2011-2014
Mr Tshediso Matona, DPE Director General, explained the evolution of the Department’s strategic mandate over the years since 1994. From 1994 to 1998, the establishment of the Department as the office of privatisation focused on the disposal of state-owned enterprises (SOEs). From 1998 to 2003 the emphasis shifted to the restructuring of SOEs with a strong focus on equity partnerships, initial public offerings and the concession of specific assets to optimise shareholder value and economic efficiency. Post 2003 the Department had focused on developing SOEs as focused and sustainable state owned business entities delivering on a specific strategic economic mandate. The long term achievements envisaged were the security of supply in energy through the build programme, a national presence in airline capacity, broadband capacity, and efficient transport infrastructure. Achievements also focused on the consolidation of aerospace capability, a focused manufacturing capability and the export of defence solutions.

Mr Matona explained that the shareholder had distinct responsibilities and exercised specific powers which included the appointment of all directors after Cabinet approval as well as the approval of significant and material transactions. The board and management were responsible for ensuring the financial sustainability of the company through coherent utilisation of the company’s assets, the appointment of all management and staff as well as the management of all aspects of operations. Funding had to be derived from a commercial tariff. The scale of the infrastructure challenge was too large for it to be funded out of the fiscus alone. Government needed an enterprise in the sector to ensure continuity of strategic intent.

Mr Matona highlighted the key advantages of the SOE model. It provided the South African state with a vehicle to drive investment in key areas. It enabled consistency of strategic intent and charged a commercial tariff thereby ensuring that the sector paid for its development. This was particularly important when the sector was of a scale which made it impossible for fiscus to fund its development. SOEs also had the ability to partner with the private sector because of a common underlying logic that both were commercial and companies. A core role of the SOE was to provide a strategic network infrastructure to ensure the security of supply. Government was the only social agent with an intrinsic interest in ensuring adequate investment in infrastructure. Network infrastructure such as logistics, energy, and telecommunications was fundamental to supporting general economic activity.

Mr Matona explained that government investment did not preclude operational partnerships with, or direct investment from, the private sector. However, while such investment was a prerequisite to sustaining the economy, it would not enable a transformation of the economic trajectory. South Africa was facing a range of economic challenges. Key challenges included accelerating the growth rate of the economy to create wealth that enhanced the standard of living for all South Africans; employment creation needed to be dramatically increased in the formal economy; and industrial capabilities had to be developed to decrease the country’s dependence on commodity exports.

Mr Matona said that a range of policies reflected the commitment of the South African government to overcome these challenges. These included the Performance Evaluation Framework, the New Growth Path, and the Industrial Policy Action Plan. These policies would help to increase investment in fixed assets, technologies and skills to support the growth process. This would enhance the competitiveness of the economy through better infrastructure services, managing the value of the currency and leverage public procurement to develop manufacturing. A particular challenge was the infrastructure investment backlog resulting from investment at around 5% of GDP between 1994 and 2004.

Mr Matona outlined the Department’s plan of action in response to the national economic strategy and the New Growth Path. The present constrained growth situation was linked to a SOE balance sheet planning, funding and procurement process. For the SOE to play a role as a growth catalyst, a paradigm shift was required in the design and implementation of SOE investment programmes. To enable the paradigm shift, the Department needed to engage with seven key initiatives:
▪ Plan in a manner that unlocks customer growth potential and gets to a steady state of demand so as to enable the sustainability of both the enterprise’s capability to procure and its supplier communities
▪ Develop innovative funding mechanisms, involving customers and financial institutions to drive lead investments in infrastructure capacity
▪ Procure in a manner that leverages investment and capacity building in the associated supply chain
▪ Drive productivity improvements in selected areas through active shareholder oversight
▪ Leverage the SOE position amongst customers and suppliers to drive transformation, particularly skills development
▪ Create an enabling policy and regulatory environment for the vision
▪ Enter into compacts with customers, suppliers and other relevant stakeholders around investment, efficiency and transformation.

Mr Matona said that in the short to medium term, the Department’s strategic focus would be on implementing initiatives to drive investment in infrastructure that unlocked higher growth rates. This would be done by providing decisive leadership and ensuring that the government shareholder management model was implemented. The policy and regulatory framework needed to be refined and the outputs and sub-outputs linked to Outcome 6 and those contained in the Minister’s Service Delivery Agreement, ad to be achieved. Mr Matona added that it should be recognised that the DPE’s role as Shareholder was distinctly different from the role of policy dpartments, who were also shareholders. This Shareholder role required specific capacity and capability to enhance the Department’s technical ability to manage SOE investments, which in itself required adequate mechanisms to attract and retain specialised technical skills. The Department’s inability to source the required technical skills affected its role in being a value-adding interface between the SOE, policy dpartments, SOE customers and other stakeholders. The recession had also impacted the functioning of SOEs.

Mr Matona then continued by presenting the performance by the Department against the 2010/11 strategic plan. One of the outcomes was the delivery of new Electricity Generation capacity by Eskom according to its approved build plan and as directed by the Integrated Resource Plan (IRP). The progress on this was that 5032 MW was commissioned and would be delivered to the system by 2017. Another outcome for 2010/11 was the facilitation of the introduction of Independent Power Producers (IPP) as determined by the IRP. The progress to date was that a ring-fenced procurement function had been established with Eskom as an interim arrangement to facilitate IPP procurement. Restructuring the Pebble Bed Modular Reactor (PBMR) company was also an outcome for the Department over this period and the downsizing of the company to nine permanent staff had been completed. The packaging of the intellectual property (IP) and the company’s operation in preparation for the Care and Maintenance phase was largely complete.

Mr Matona said that the restructuring of Denel and the creation of a Remuneration Panel that will promote appropriate remuneration policies and practices for Chief Executives and the Boards of Directors of SOE were other outcomes envisaged during the 2010/11 strategic plan. This panel had completed its report and recommendations and the DPE was currently in the process of consulting with key stakeholders before a final decision was submitted to Cabinet for endorsement. The agreement had been completed on a way forward with the Richtersveld Community to ensure that the lives of the community were improved. All Alexkor, State and Northern Cape Provincial land had been transferred. Subdivision and zoning of the Township was conducted and general plans had been approved. The upgrade of township civil and electrical engineering services to municipal standards had commenced and was expected to be completed by July 2011. Alexkor’s agricultural and mari-cultural assets have also been transferred to the community. Other key measurable outputs included an assessment of strategic options for the future of South African Airways (SAA) and alignment to an African Aviation Strategy and a rail reform policy process and implications for Transnet Freight Rail.

Mr Matona provided an expenditure overview of the Department’s budget appropriation for 2010/11. The Department had spent 88.45% of its annual appropriation up to 28 February 2011 amounting to R491.4 million. The remainder of the budget would be used for disbursement during March by giving a R20 million transfer payment to PBMR, R6.3 million for commitments (orders placed) and R7.5 million towards salaries.

Mr Matona went on to explain the Department’s 2011-14 Strategic Plan. This included outlining the organisational structure, DPE budget and SOE transfers and guarantees. As at 1 March 2011, there were 162 filled posts out of a total of 185 posts in the Department and the vacancy rate was at 12.43%. Employment equity targets were determined by Statistics South Africa (Stats SA) and these targets were partially reached in some ethnic groups. Mr Matona gave the DPE budget for its programmes: Administration; Energy and Broadband Enterprises; Legal and Governance; Manufacturing Enterprises; Transport Enterprises; Joint Project Facility and the transfer payments and payment for financial assets to SOEs. Over the MTEF period, expenditure would decrease from R555.5 million in 2010/11 to R210.4 million in 2013/14 which was as a result of reduced transfer payments to SOEs. This decrease was marginally offset by an increase of R30.1 million in current payments over the same period. The increase was mainly due to increased spending on compensation of employees due to annual increments and an increase in the establishment from 175 personnel in September 2010 to 181 in 2011/12 and going forward to the outer years. Accordingly, expenditure on goods and services would increase to provide support to the larger personnel establishment.

Mr Matona spoke about the priority areas and expected outcomes and targets for each of the six programmes. Finally, he looked at the contributions and impact of the SOEs, specifically Transnet and Eskom’s investment programmes, the broader economic impact of Denel, SAA, South African Express and Infraco and the developmental role of SAFCOL.
 
Discussion
Ms G Borman (ANC) thanked Mr Matona for the presentation. She said that the Department required high calibre skilled people as noted in the presentation, but the Department was limited in its ability to attract and maintain those skills. She wanted to know how this problem would be addressed. 

Mr Matona replied that skills constraints were a problem across government as a whole. Over time a gap had developed because of the lucrative salaries the private sector was offering skilled graduates. To attract these skills, more needed to be done about the required innovation by revising offers.

Mr C Gololo (ANC) said that the strategic plan was clear and sound. There would be challenges, but these could be addressed. With regards to Alexkor, he wanted to know what the latest developments between the Department and the Richtersveld community were.

Mr Anthony Kamungoma, DPE Acting Deputy Director General: Investment and Portfolio Management, , said that Alexkor had been subject to a number of constraints due to land claims. These constraints resulted in dismal financial performance. However, significant progress had been made in the implementation of the settlement signed with Richtersveld community. All Alexkor, State and Northern Cape provincial land had been transferred, except for the township. The subdivision and zoning of the township had been conducted and approved. Transfer of the township would be made soon and this was expected to be completed in its entirety in July 2011.

Mr M Sonto (ANC) said that the paradigm shift in the Department was admirable. He wanted to know however how the Department planned to market this shift in thinking within other departments as they may have taken another route.

Mr Matona replied that the Department was working within intergovernmental structures and the engagement with the relevant departments was happening. The Minister of Public Enterprises was engaging with the Ministers of Energy and Transport.

Mr A Mokoena (ANC) asked how the Department planned to address the issue of stolen copper and electricity and whether there was any legislation planned to deal with this problem.

Mr Chris Forlee, DPE Deputy Director General: Energy and Broadband, said that the Department was currently working together with the Department of Energy to formulate an Electricity Regulation Amendment Bill to address this issue, which would ensure that the theft of electricity was punishable by law.

Mr P Van Dalen (DA) asked whether the allocated budget would fulfil the expected outcomes. This money had to be properly managed to ensure service delivery.

Mr Matona replied that the budget would be enough to fulfil the mandate of the Department; the problem was with the SOEs and the transfers. But since transfers would no longer take place from 2012/13 onwards so this would be an opportunity for SOEs to start improving their financial performance.

Dr S Van Dyk (DA) said that the budget of the Department reflected that personnel expenditure would amount to 40-50% of the budget. How many directors and chief directors were appointed to the Department? He added that year after year the Department presented turnaround strategies, but there were no positive performances to be proud of. The new approach by the Department needed to measure output and productivity of the SOEs. Aims and targets had to be set.

Ms Shireen Crosson, DPE Corporate Services, said that there were currently 19 Chief Director and 32 Director posts in the Department, with a total of 69 top level posts. The personnel expenditure was a reflection of the natural progression of salary increases, as recommended by National Treasury.

Ms C September (ANC) suggested that quarterly meetings should be held with the Department and SOEs to keep track of job creation progress. The Department also needed more involvement in infrastructure and the Committee needed to strengthen their oversight role to ensure that targets were met.

Ms Borman asked what the morale of the Department was like with regards to the Presidential Review Committee. Staffing needed to be motivated to speed up what needed to be done.

Mr Matona replied that the last two years had been a challenging period for the Department, with the changing of Ministers. There had been four different Ministers appointed in these two years and this had resulted in the loss of purpose and direction for a while, but the turnaround strategy aimed to improve this. The Review Committee was a good initiative as it would serve to help the Department in its function.

Mr Gololo asked whether there was a timeframe set for the filling of vacancies.

Mr Matona replied that the vacancies at top management structure would be filled by June 2011, but the other vacancies would be filled as soon as possible.

Mr Mokoena asked whether there was any litigation against the Department or SOE or whether there were any outstanding court cases.

Ms Matsietsi Mokholo, Acting Deputy Director General: Legal and Governance, said that with regards to outstanding litigation there were a number of cases. The Department did come in to help SOEs in this regard. There was a list of litigation that could be provided to members if requested.

Ms Borman asked if the R40 million allocated to PBMR over the 2011/12 MTEF would be enough to ensure the closure of this unit.

Mr Forlee replied that a total of R60 million rand was allocated to the care and maintenance of PBMR. This included the dismantling and decommissioning of the fuel development laboratory. No additional funds would be required after this had been done.

The Chairperson asked whether there was any legislation governing shareholder management.

Mr Matona replied that there was currently not any law that had been passed as legislation but the Department had prepared a Shareholder Management Bill. When this Bill went to Cabinet for approval, there were some blockages due to the fact that at the same time National Treasury was proposing amendments to the Public Finance Management Bill. These amendments dealt with the same matters as in the proposed Shareholder Management Bill.

Mr Mokoena said that the recession had a considerable impact on the performance of SOEs. He asked how SOEs could get out of the financial crunch and raise funds.

Mr Edwin Ritchken, DPE Strategic Projects Manager, said that SOEs could rely on long term investments, as was the case in other countries, to fund its operations. He used an example whereby French companies had invested in an energy producing SOE for a long-term period. These companies bought energy from the SOE upfront, which ensured that they would have a secure supply of energy in the long term. This resulted in the financial security of the SOEs and the peace of mind for the companies that their energy needs would be taken care of. This type of model could be used in South Africa for the sustainability of SOEs without the over-reliance on funding from government.
 
Mr Van Dalen said that he was worried that the Department was not taking enough charge when dealing with SOEs who were not performing. He wanted more clarity on the Broadband Infraco report dealing with the investigation of conflict of interest, as it was reported that the board chairperson and directors had awarded themselves contracts.

Mr Matona replied that an audit was done on the suspicion of conflict of interest. These were valid concerns though yet unproven. A forensic investigation was conducted and declared these interests. This also demonstrated the need for oversight. Someone from the Department went to fill the position of the acting CEO. The Committee would be kept up to date with what was found.
 
The meeting was adjourned.